Question

On December 31, 2011, Daggett Company issued $750,000 of ten-year, 9% bonds payable for $700,353, yielding an effective interest rate of 10%. Interest is payable semiannually on June 30 and December 31. Prepare journal entries to reflect (a) the issuance of the bonds, (b) the semiannual interest payment and discount amortization (effective interest method) on June 30, 2012, and (c) the semiannual interest payment and discount amortization on December 31, 2012. Round amounts to the nearest dollar.

Answer 1

(A)

cash 700,353

discount 49,647

bonds payable 750,000

(B)

interest expense 70035.3

cash 67,500

discount on bonds 2535.3

(C)

interest expense 70,288.83

cash 67,500

discount on bonds 2,788.83

Step-by-step explanation:

(A) face value - issued amount = discount

(B)

`purchase \: cost * effective \: rate = interest \: expense`

`700,353 * 0.10 = 70035.3 \: interest \: expense`

`750,000 * 0.09 = 67,500 cash \:disbursement`

Amoritization On discounts will be the diference 2535.3

(C) same procedure as (B) but now the bond value increase.

It is 700,353 + 2535.3 = 702,888.3

`702,888.3 * 0.10 = 70,288.83 \: interest \: expense`

`750,000 * 0.09 = 67,500 \:cash \:disbursement`

Amoritization On discounts will be the diference 2,788.83