Question

Assume the same information as in IFRS14-5, except that the bonds were issued at 84.95 to yield 12%. Prepare the journal entries to record (a) the issuance of the bonds, (b) the payment of interest and related amortization on July 1, 2017, and (c) the accrual of interest and the related amortization on December 31, 2017. (Round to the nearest dollar.)

Short answer

1. The bonds are issued at a discount of$120,400.
2. Discount of$776 was amortized on 1 July 2017.
3. Interest expenses of$40,823 were reported on 31 Dec 2017.

Step-by-step solution

Definition of Bonds Payable

Bonds payable can be defined as the security issued by the business entity for generating cash for the business entity. These securities are debt securities.

Issuance of bonds

Date	Accounts and Explanation	Debit $	Credit $
1 Jan 2017	Cash	$679,600
	Discount on bond payable	$120,400
	Bond payable		$800,000

Payment of interest and amortization

Date	Accounts and Explanation	Debit $	Credit $
1 July 2017	Interest expenses	$40,776
	Discount on bond payable		$776
	Cash		$40,000

Working note: Amortization table

Date	Cash interest at the stated rate on bond payable (5%)	Interest expenses at market rate on carrying value (6%)	Discount amortized	Unamortized Discount	Bond payable	Carrying value
1 Jan 2017				$120,400	$800,000	$679,600
1 July 2017	$40,000	$40,776	$776	$119,624	$800,000	$680,376
31 Dec 2017	$40,000	$40,823	$823	$118,801	$800,000	$681,199

 Accrual of interest and amortization

Date	Accounts and Explanation	Debit $	Credit $
31 Dec 2017	Interest expenses	$40,823
	Discount on bond payable		$823
	Interest payable		$40,000