Question

Gomez issues \(240,000 of 6%, 15-year bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. They are issued at \)198,494, and their market rate is 8% at the issue date.

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 life of the bonds.
3. Prepare a straight-line amortization table like the one in Exhibit 10.7 for the bonds’ first two years.
4. Prepare the journal entries to record the first two interest payments.

Short answer

1. Cash and Discount on bonds payable are debited by $198,494 and $41,506, and Bond payable is credited by $240,000.
2. The total bond interest expense is $257,506.
3. The Unamortized discounts for two years are $41,506, $40,122, $38,738, $37,354 and $35,970.
4. Bond interest expense is debited by $8,584, and Discounts on Bond payable and Cash are credited by $1,384 and $7,200.

Step-by-step solution

Meaning of Bond

Sometimes a company raises funds from the public by issuing a written document specifying that to pay certain some of the money along with timely interest payments is known as bonds.

(1) Journal entry to record issuance of bond

Date	Particulars	Debit ($)	Credit ($)
Jan 1, 2017	Cash	198,494
	Discount on bonds payable	41,506
	Bond payable		240,000
	(To record issue of bond at discount)

Step 3:Calculation showing thetotal bond interest expense

Particulars	Amount ($)
Thirty Payments of $7,200$\mathbf{[}\mathbf{30}\mathbf{\times }\mathbf{(}\mathbf{\$}\mathbf{240}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{6}\mathbf{\%}\mathbf{\times }\frac{\mathbf{1}}{\mathbf{2}}\mathbf{)}\mathbf{]}$	$216,000
Add: Discount	$41,506
Total bond interest expense	$257,506

 Step 4: (3) Amortization table

	Semi-annual period end	Unamortized discount	Carrying value
0	01-01-2017	$41,506	$198,494
1	30-06-2017	$40,122	$199,878
2	31-12-2017	$38,738	$201,262
3	30-06-2018	$37,354	$202,646
4	31-12-2018	$35,970	$204,030

(4) Entry to record the first two interest payment

Date	Particulars	Debit ($)	Credit ($)
June 30, 2017	Bond interest expense	8,584
	Discount on bonds payable		1,384
	Cash		7,200
	(To pay semi-annual interest and record amortization)
Dec 31, 2017	Bond interest expense	8,584
	Discount on bonds payable		1,384
	Cash		7,200
	(To pay semi-annual interest and record amortization)