Question

Amortize Discount by Interest Method On the first day of its fiscal year, Ebert Company issued $50,000,000 of 10-year, 7% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 9%, resulting in Ebert receiving cash of $43,495,895. The company uses the interest method.

a. Journalize the entries to record the following:
1. Sale of the bonds. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.
Cash _________, _________
Discount on Bonds Payable _________, _________
Bonds Payable _________,_________

Answer 1

The initial journal entry for Ebert Company's bond issue involves debiting cash for the amount received, debiting discount on bonds payable for the difference between face value and received amount, and crediting bonds payable for the face value of the bonds.

Step-by-step explanation:

To amortize the bond discount using the interest method for Ebert Company's $50,000,000 of 7% bonds issued at a discount, we must first calculate the interest expense based on the market rate. The entries on the day of sale would reflect the receipt of cash and the establishment of the bonds payable and discount on bonds payable accounts.

The journal entry to record the sale of the bonds at a discount is:

• Debit Cash $43,495,895
• Debit Discount on Bonds Payable $6,504,105
• Credit Bonds Payable $50,000,000

This journal entry records the issuance of the bonds at a discount, which represents the difference between the face value of the bonds and the amount of cash received. Over the life of the bonds, this discount will be amortized to interest expense, which will increase the amount of interest expensed beyond the cash payments for interest based on the stated rate of the bond.