Question

Journalizing bond transactions using the effective-interest

amortization method

Journalize issuance of the bond and the first semiannual interest payment undereach of the following three assumptions. The company amortizes bond premiumand discount by the effective-interest amortization method. Explanations are notrequired.

1. Seven-year bonds payable with face value of \(83,000 and stated interest rate of10%, paid semiannually. The market rate of interest is 10% at issuance. The presentvalue of the bonds at issuance is \)83,000.

2. Same bonds payable as in assumption 1, but the market interest rate is 16%. Thepresent value of the bonds at issuance is \(62,433.

3. Same bonds payable as in assumption 1, but the market interest rate is 8%. Thepresent value of the bonds at issuance is \)91,727.

Short answer

1. The cash account is debited with $83,000 and the bonds payable account is credited with $83,000.

Interest expenses debited by $4,150 and cash is credited by $4,150.

2. The Cash and discount on issue of bond is debited by $62,433 and $20,567 and bonds payable credited by $83,000.

Interest expenses debited by $4,995. Discount and cash credited by $845 and $4,150.

3. The cash debited by $91,727. The premium on bonds payable and bonds payable credited by $8,727 and $83,000.

Interest expenses and premium on bonds payable debited by $3,670 and $480. The cash credited by $4,150.

Step-by-step solution

Definition of bonds issued at par

When the stated interest rate is equal to the market interest rate, these bonds are known as bonds issued at par.

Journal entries

S.no.	Date	Accounts and Explanations	Debit	Credit
1,		Cash	$83,000
		10% Bonds Payable		$83,000
		(To record the issuance of bonds)
		Interest Expense	$4,150
		Cash		$4,150
		(To record the payment of interest)
2.		Cash	$62,433
		Discount on 10% Bonds Payable	$20,567
		10% Bonds Payable		$83,000
		(To record the issuance of bonds)
		Interest Expense	$4,995
		Discount on Bonds Payable		$845
		Cash		$4,150
		(To record the payment of interest)
3.		Cash	$91,727
		Premium on 10% Bonds Payable		$8,727
		10% Bonds Payable		$83,000
		(To record the issuance of bonds)
		Interest Expense	$3,670
		Premium on Bonds Payable	$480
		Cash		$4,150
		(To record the payment of interest)

Calculation of interest expenses (Part 1):

$\begin{array}{c}\mathbf{C}\mathbf{o}\mathbf{u}\mathbf{p}\mathbf{o}\mathbf{n}\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\mathbf{=}\mathbf{P}\mathbf{a}\mathbf{r}\mathbf{V}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}\mathbf{\times }\mathbf{C}\mathbf{o}\mathbf{u}\mathbf{p}\mathbf{o}\mathbf{n}\mathbf{R}\mathbf{a}\mathbf{t}\mathbf{e}\mathbf{\times }\mathbf{T}\mathbf{i}\mathbf{m}\mathbf{e}\mathbf{P}\mathbf{e}\mathbf{r}\mathbf{i}\mathbf{o}\mathbf{d}\\ \mathbf{=}\mathbf{\$}\mathbf{83}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{10}\mathbf{\%}\mathbf{\times }\frac{\mathbf{6}}{\mathbf{12}}\\ \mathbf{=}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{150}\end{array}$

Calculation of discount allowed and interest expenses (part 2):

$\begin{array}{c}\mathbf{D}\mathbf{i}\mathbf{s}\mathbf{c}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\mathbf{A}\mathbf{l}\mathbf{l}\mathbf{o}\mathbf{w}\mathbf{e}\mathbf{d}\mathbf{=}\mathbf{P}\mathbf{a}\mathbf{r}\mathbf{V}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}\mathbf{-}\mathbf{I}\mathbf{s}\mathbf{s}\mathbf{u}\mathbf{e}\mathbf{d}\mathbf{P}\mathbf{r}\mathbf{i}\mathbf{c}\mathbf{e}\\ \mathbf{=}\mathbf{\$}\mathbf{83}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{62}\mathbf{,}\mathbf{433}\\ \mathbf{=}\mathbf{\$}\mathbf{20}\mathbf{,}\mathbf{567}\end{array}$

$\begin{array}{c}\mathbf{D}\mathbf{i}\mathbf{s}\mathbf{c}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\mathbf{O}\mathbf{n}\mathbf{B}\mathbf{o}\mathbf{n}\mathbf{d}\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{r}\mathbf{t}\mathbf{i}\mathbf{z}\mathbf{e}\mathbf{d}\mathbf{=}\mathbf{I}\mathbf{s}\mathbf{s}\mathbf{u}\mathbf{e}\mathbf{P}\mathbf{r}\mathbf{i}\mathbf{c}\mathbf{e}\mathbf{\times }\mathbf{I}\mathbf{n}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{e}\mathbf{s}\mathbf{t}\mathbf{R}\mathbf{a}\mathbf{t}\mathbf{e}\mathbf{\times }\mathbf{P}\mathbf{e}\mathbf{r}\mathbf{i}\mathbf{o}\mathbf{d}\mathbf{-}\mathbf{C}\mathbf{o}\mathbf{u}\mathbf{p}\mathbf{o}\mathbf{n}\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\\ \mathbf{=}\mathbf{\$}\mathbf{62}\mathbf{,}\mathbf{433}\mathbf{\times }\mathbf{16}\mathbf{\%}\mathbf{\times }\frac{\mathbf{1}}{\mathbf{2}}\mathbf{-}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{150}\\ \mathbf{=}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{995}\mathbf{-}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{150}\\ \mathbf{=}\mathbf{\$}\mathbf{845}\end{array}$

$\begin{array}{c}\mathbf{I}\mathbf{n}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{e}\mathbf{s}\mathbf{t}\mathbf{E}\mathbf{x}\mathbf{p}\mathbf{e}\mathbf{n}\mathbf{s}\mathbf{e}\mathbf{s}\mathbf{=}\mathbf{D}\mathbf{i}\mathbf{s}\mathbf{c}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\mathbf{O}\mathbf{n}\mathbf{B}\mathbf{o}\mathbf{n}\mathbf{d}\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{r}\mathbf{t}\mathbf{i}\mathbf{z}\mathbf{e}\mathbf{d}\mathbf{+}\mathbf{C}\mathbf{o}\mathbf{u}\mathbf{p}\mathbf{o}\mathbf{n}\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\\ \mathbf{=}\mathbf{\$}\mathbf{845}\mathbf{+}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{150}\\ \mathbf{=}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{995}\end{array}$

Calculation of premium amount and interest expenses (part 3):

$\begin{array}{c}\mathbf{P}\mathbf{r}\mathbf{e}\mathbf{m}\mathbf{i}\mathbf{u}\mathbf{m}\mathbf{o}\mathbf{n}\mathbf{B}\mathbf{o}\mathbf{n}\mathbf{d}\mathbf{=}\mathbf{I}\mathbf{s}\mathbf{s}\mathbf{u}\mathbf{e}\mathbf{d}\mathbf{P}\mathbf{r}\mathbf{i}\mathbf{c}\mathbf{e}\mathbf{-}\mathbf{P}\mathbf{a}\mathbf{r}\mathbf{V}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}\\ \mathbf{=}\mathbf{\$}\mathbf{91}\mathbf{,}\mathbf{727}\mathbf{-}\mathbf{\$}\mathbf{83}\mathbf{,}\mathbf{000}\\ \mathbf{=}\mathbf{\$}\mathbf{8}\mathbf{,}\mathbf{727}\end{array}$

$\begin{array}{c}\mathbf{P}\mathbf{r}\mathbf{e}\mathbf{m}\mathbf{i}\mathbf{u}\mathbf{m}\mathbf{o}\mathbf{n}\mathbf{B}\mathbf{o}\mathbf{n}\mathbf{d}\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{r}\mathbf{t}\mathbf{i}\mathbf{z}\mathbf{e}\mathbf{d}\mathbf{=}\mathbf{C}\mathbf{o}\mathbf{u}\mathbf{p}\mathbf{o}\mathbf{n}\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\mathbf{I}\mathbf{s}\mathbf{s}\mathbf{u}\mathbf{e}\mathbf{P}\mathbf{r}\mathbf{i}\mathbf{c}\mathbf{e}\mathbf{\times }\mathbf{I}\mathbf{n}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{e}\mathbf{s}\mathbf{t}\mathbf{R}\mathbf{a}\mathbf{t}\mathbf{e}\mathbf{\times }\mathbf{P}\mathbf{e}\mathbf{r}\mathbf{i}\mathbf{o}\mathbf{d}\\ \mathbf{=}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{150}\mathbf{-}\mathbf{\$}\mathbf{91}\mathbf{,}\mathbf{727}\mathbf{\times }\mathbf{8}\mathbf{\%}\mathbf{\times }\frac{\mathbf{1}}{\mathbf{2}}\\ \mathbf{=}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{150}\mathbf{-}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{670}\\ \mathbf{=}\mathbf{\$}\mathbf{480}\end{array}$

role="math" localid="1657181921662" $\begin{array}{c}\mathbf{InterestExpenses}\mathbf{=}\mathbf{CouponAmount}\mathbf{-}\mathbf{\text{Premium}}\mathbf{onBondAmortized}\\ \mathbf{=}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{150}\mathbf{-}\mathbf{\$}\mathbf{480}\\ \mathbf{=}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{670}\end{array}$