Question

Sunland Company issued its 9%, 25-year mortgage bonds in the principal amount of $2,990,000 on January 2, 2006, at a discount of $151,000, which it proceeded to amortize by charges to expense over the life of the issue on a straight-line basis. The indenture securing the issue provided that the bonds could be called for redemption in total but not in part at any time before maturity at 106% of the principal amount, but it did not provide for any sinking fund.

Answer 1

Answer:

Cash                 2,839,000 debit

discount on BP     151,000 debit

          Bonds Payabl*e          2,990,000 credit

--to record bonds issuance--

interest expense 275,140 debit

        discount on BP          6,040 credit

        cash                         269,100 credit

--to record interest payment--

Explanation:

We will cacualte the cash outlay per interest paymenr

2,990,000 x 9% = 269,100 cash outlay

Then, we divide the discount over the life of the bond to knwo the depreciation:

amortization 151,000 / 25 = 6040

interest expense: 269,100 + 6040 = 275,140

As both, the amortization and cash putlay are fixed th interest entry repeats it selft each year.