Question

(L01) Assume the bonds in BE14-2 were issued at 98. Prepare the journal entries for (a) January 1, (b) July 1, and (c) December 31. Assume The Colson Company records straight-line amortization semiannually.

Short answer

The total for both debit and credit sides is $331,200.

Step-by-step solution

Meaning of Straight Line Amortization

When the discount on the bond is amortized over the maturity period in a fixed annual amount, dividing the discount amount by the maturity period is known as straight-line amortization. The maturity period becomes twice oforiginal maturity period if interest is payable semi-annually.

Journal Entries

Journal Entries
Date	Accounts and Explanation	Debit	Credit $
January 1, 2017	Cash	$294,000
	Discount on Bonds Payable	$6,000
	Bonds Payable		$300,000
July 1, 2017	Interest expenses	$15,600
	Cash		$15,000
	Discount on Bonds Payable		$600
December 31, 2017	Interest expenses	$15,600
	Interest Payable		$15,000
	Discount on Bonds Payable		$600

Working:

Cash on January 1, 2017 = ($300,000 x 98%) = $294,000

Interest expenses paid cash on July 1, 2017 = ($300,000 x 10% x 6/12) = $15,000

Discount on bonds payable on July 1, 2017 (amortize semi-annually) = ($6,000 x 1/10) = $600

Discount on bonds payable on December 31, 2017 = ($6,000 x 1/10) = $600