Question

Record bonds issued at a discount (LO9-6) [The following information applies to the questions displayed below.] On January 1, 2018, Splash City issues $450,000 of 7% bonds, due in 10 years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 8%, the bonds will issue at $419,422.
Required:
1. Complete the first three rows of an amortization table.
2. Record the bond issue on January 1, 2018, and the first two semiannual interest payments on June 30, 2018, and December 31, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Answer:

Period      Interest        Bond discount       Interest           Book

                payment       amortization          expense         value

0                    -                      -                             -                 $419,422

1                $15,750        $1,528.90              $17,278.90     $420,950.90

2               $15,750        $1,528.90              $17,278.90     $422,479.80

3               $15,750        $1,528.90              $17,278.90     $424,008.70

January 1, 2018, bonds are issued

Dr Cash 419,422

Dr Discount on bonds payable 30,578

    Cr Bonds payable 450,000

June 30, 2018, first coupon payment

Dr Interest expense 17,278.90

    Cr Cash 15,750

    Cr Discount on bonds payable 1,528.90

Discount on bonds payable using the straight line method = $30,578 / 20 coupon payments = $1,528.90

December 31, 2018, second coupon payment

Dr Interest expense 17,278.90

    Cr Cash 15,750

    Cr Discount on bonds payable 1,528.90