Question

Refer to the bond details in Problem 10-5A.

Required

1. Prepare the January 1, 2017, journal entry to record the bonds’ issuance.
2. Determine the total bond interest expense to be recognized over the bonds’ life.
3. Prepare an effective interest amortization table like the one in Exhibit 10B.1 for the bonds’ first two years.
4. Prepare the journal entries to record the first two interest payments.

Short answer

1. The bond is issued at a discount of $32,819.
2. The total bond interest expense is $97,819.
3. The carrying value of the bond at the end of the second year is $307,308.
4. The bond interest expense recognized is $12,227.

Step-by-step solution

Meaning of Bond

A bond refers to a written document issued by a company to raise money for the business, and in return, the company pays an interest to the bondholders.

Journal entry to record issuance of bond

Date	Account and explanation	Debit ($)	Credit ($)
Jan 1, 2017	Cash	292,181
	Discount on bonds payable	32,819
	Bond payable		325,000
	(To record issuance of bonds)

Computation of total bond interest expense

Particulars	Amount ($)
Eight Payments of $8,125 $\left[8\times \left(\$325,000\times 5\%\times \frac{1}{2}\right)\right]$	$65,000
Add: Discount	$32,819
Total bond interest expense	$97,819

Amortization table

Bonds: $325,000 par value, semi-annual interest payments, two-year life, 2.5% semi-annual contract rate, 4% semi-annual market rate

		A	B	C	D	E
	Semi-annual period end	Cash interest paid (2.5% of $325,000)	Bond interest expense (4% of prior E)	Discount amortization (B)-(A)	Unamortized discount Prior (D)-(C)	Carrying value $325,000-(D)
0	01-01-2017				$32,819	$292,181
1	30-06-2017	8,125	11,687	3,562	$29,257	$295,743
2	31-12-2017	8,125	11,830	3,705	$25,552	$299,448
3	30-06-2018	8,125	11,978	3,853	$21,699	$303,301
4	31-12-2018	8,125	12,132	4,007	$17,692	$307,308

Journal entry to record the first two interest payment

Date	Account and explanation	Debit ($)	Credit ($)
June 30,2017	Bond interest expense	12,227
	Discount on bonds payable		4,102
	Cash		8,125
	Pay semi-annual interest and record amortization.
Dec 3, 2017	Bond interest expense	12,227
	Discount on bonds payable		4,102
	Cash		8,125
	Pay semi-annual interest and record amortization

Working note:

$\begin{array}{rcl}\mathrm{Straight}\mathrm{line}\mathrm{discount}\mathrm{amortization}& =& \frac{\mathrm{Discount}}{\mathrm{semiannual}\mathrm{periods}}\\ & =& \frac{\$32,819}{8}\\ & =& \$4,102\end{array}$