Question

On January 1, 2019, Electro Inc. issued $740,000 of 7.5%, four-year bonds that pay interest semiannually on June 30 and December 31. They are issued at $680,186 and their market rate is 10% at the issue date. After recording the entry for the issuance of the bonds, Bonds Payable had a balance of $740,000 and Discount on Bonds Payable had a balance of $59,814. Electro uses the effective interest bond amortization method. The first semiannual interest payment was made on June 30, 2019.

Answer 1

Answer:

Cash      680,186   debit

discount on BP   59,814 debit

       Bonds payable                  740,000 credit

--to record issuance of the bonds--

interest expense 34009.3 debit

discount on BP       6259.3 credit

cash                   27750 credit

--to record first payment of the bonds--

Explanation:

procceds                         680,186

face value                         740,000  

discount on bonds payable    59,814

bond rate (semi-annually) 7.5% / 2 = 0.0375

market rate (semi-annually) 10% / 2  = 0.05

The first payment will be:

cash proceeds: face value x bond rate:

740,000 x 0.0375 = 27,750

interest expense: carrying value x market rate

680,186 x 0.05 = 34,009.3

amortization on discount on BP:

34,009.3 - 27,750 = 6259.3