Question

Legacy issues $570,000 of 8.5%, four-year bonds dated January 1, 2019, that pay interest semiannually on June 30 and December 31. They are issued at $508,050 when the market rate is 12%.
1. Determine the total bond interest expense to be recognized.
Total bond interest expense over life of bonds:
Amount repaid:
8 payments of $24,225 $193,800
Par value at maturity 570,000
Total repaid 763,800
Less amount borrowed 645 669
Total bond interest expense $118.131
2. Prepare a straight-line amortization table for the bonds' first two years.
Semiannual Period End Unamortized Discount Carrying Value
01/01/2019
06/30/2019
12/31/2019
06/30/2020
12/31/2020
3. Record the interest payment and amortization on June 30. Note:
Date General Journal Debit Credit
June 30
4. Record the interest payment and amortization on December 31.
Date General Journal Debit Credit
December 31

Answer 1

Answer:

1) Determine the total bond interest expense to be recognized.

Total bond interest expense over life of bonds:

Amount repaid:    

8 payments of $24,225:           $193,800    

Par value at maturity:                 $570,000    

Total repaid:                                   $763800 (193,800 + 570,000)  

Less amount borrowed:         $508050    

Total bond interest expense: $255750 (763800 - 508,050)

2)Prepare a straight-line amortization table for the bonds' first two years.

Semiannual Interest Period­ End; Unamortized Discount; Carrying Value

01/01/2019                                      61,950                           508,050  

06/30/2019                                      54,206                          515,794  

12/31/2019                                       46,462                         523,538  

06/30/2020                                       38,718                        531,282  

12/31/2020                                         30,974                          539,026

3) Record the interest payment and amortization on June 30:

June 30            Bond interest expense, dr                         31969  

                       Discount on bonds payable, Cr     (61950/8)  7743.75

                                        Cash, Cr                     ( 570000*8.5%/2)  24225  

4) Record the interest payment and amortization on December 31:

Dec 31                 Bond interest expense, Dr               31969  

                           Discount on bonds payable, Cr  7744  

                                    Cash, Cr                                24225