Question

A company issued 10-year, 9% bonds with a par value of $500,000 when the market rate was 9.5%. The company received $484,087 in cash proceeds. Using the straight-line method, prepare the issuer's journal entry to record the first semiannual interest payment and the amortization of any bond discount or premium.(Round amounts to the nearest whole dollar)

Answer 1

The company records the semiannual interest payment and amortization of bond discount using the straight-line method. The discount amortization is $796, and the total interest expense is $23,296. The journal entry includes debiting Interest Expense and crediting Discount on Bonds Payable and Cash.

Step-by-step explanation:

The main answer involves calculating the first semiannual interest payment and the amortization of the discount on a bond issued at a discount. The bond has a face value of $500,000, a stated interest rate of 9%, a market rate of 9.5%, and was issued for $484,087. The semiannual interest payment is $22,500 (calculated as 9% of $500,000 divided by 2). The discount on the bond is $15,913 ($500,000 minus $484,087). Using the straight-line method, the amortization of the discount is calculated by dividing the total discount by the number of periods (20 semiannual periods for a 10-year bond), resulting in a semiannual amortization of $796 (rounded to the nearest dollar).

The journal entry to record the semiannual interest payment and discount amortization is:

• Debit Interest Expense for $23,296 (the semiannual interest payment of $22,500 plus the amortization of discount of $796)
• Credit Discount on Bonds Payable for $796
• Credit Cash for $22,500

Answer 2

The Journal entries are as follows:

(1)

Cash A/c Dr. $484,087

Discount on Bonds Payable A/c Dr. $15913

To Bonds Payable (a liability account) $500,000

(To record the first semiannual interest payment )

Workings:

Discount on bonds = 500,000 - 484,087

= 15,913

2.

Bonds payable A/c Dr. $200,000

To Cash 200,000

(To record the amortization of any bond discount)