Question

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

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.

Prepare the journal entries to record the first two interest payments

Short answer

(1) Cash account is debited by $198,494, discount on bonds payable is debited by $41,506, and bonds payable is credited by $240,000.

(2) The total bond interest expense is $257,506.

(3) Schedule is prepared in Step 4.

(4) Journal entries are recorded in step 5.

Step-by-step solution

Bond

Bonds payable are the long term obligations of entity, which are issued to raise funds by way of debts.

(1) Journal entry to record issuance of bond

Jan 1,2017	Cash	$198,494
	Discount on bonds payable	$41,506
	Bond payable		$240,000
	Pay semi-annual interest and record amortization.

(2) Computation of total bond interest expense     

Interest repaid ($240,000 x 6% x1/2)x (15 x2)	$216,000
Add: Discount on bonds payable ($240,000-$198,494)	41,506
Total bond interest expense	$257,506

(3) Effective interest Amortization table

Bonds: $240,000 Par Value, Semi-annual Interest Payments, Two-Year Life, 3% Semi-annual Contract Rate, 4% Semi-annual Market Rate
	A	B	C	D	E
Semi-annual period end	Cash interest paid (3% of $240,000)	Bond interest expense (4% of prior E)	Discount amortization (B)-(A)	Unamortized discount Prior (D)-(C)	Carrying value $240,000-(D)
01-01-2017				$41,506	$198,494
30-06-2017	7,200	7,940	740	$40,766	$199,234
31-12-2017	7,200	7,969	769	$39,997	$200,003
30-06-2018	7,200	8000	800	$39,197	$200,803
31-12-2018	7,200	8,032	832	$38,365	$201,635

(4) Entry to record first two interest payment

June 30 2017	Bond interest expense	$7,940
	Discount on bonds payable		$740
	Cash		$7,200
	Pay semi-annual interest and record amortization.

Dec 31 2017	Bond interest expense	$7,969
	Discount on bonds payable		$769
	Cash		$7,200
	Pay semi-annual interest and record amortization