Question

On December 31, 2019, Wintergreen, Inc., issued $150,000 of 7 percent, 10-year bonds at a price of 93.25. Wintergreen received $139,875 when it issued the bonds (or $150,000 × .9325). After recording the related entry, Bonds Payable had a balance of $150,000 and Discounts on Bonds Payable had a balance of $10,125. Wintergreen uses the straight-line bond amortization method. The first semiannual interest payment was made on June 30, 2020.

Required:
1. Complete the necessary journal entry for June 30, 2020.

Answer 1

Dr. Interest Expense $5,756.25

Cr. Discount on Bond $506.25

Cr. Interest payable / Cash $5,250

Step-by-step explanation:

Discount Amortization

Discount on the bond will be amortized on straight line basis and it is added to interest payment to make the interest expense value.

Discount for the period = Discount on the bond / bond life to maturity

Discount for the year = $10,125 / 10 years = $1,012.5 per year

Discount for the period = $1,012.5 x 6/12 = $506.25

Coupon / Interest Payment = Face value x Coupon rate x 6/12 = $150,000 x 7% x 6/12 = $5,250

Total Interest Expense = Coupon Payment + Bond amortization = $5,250 + $506.25 = $5,756.25

Answer 2

Dr interest expense $5,756.25

Cr cash $5,250

Cr Discount on bonds payable $506.25

Step-by-step explanation:

Amortization of discount=$10,125/10 years*6/12=$506.25

The 6/12 implies that the amortization takes place every six months instead of annually.

The semiannual interest payment=$150,000*7%*6/12=$5,250

The interest payment would be credited to cash $5,250 and debited to interest expense for the year.

The amortization of discount would be credited discounts on bonds payable and credited to interest expense account as shown above in the answer section