Question

On January 1, 2017, Minter Corporation issued 9%, 10-year bonds with a face value of $900,000 at 93.78. Interest is payable semiannually on January 1 and July 1. The effective-interest rate when the bonds were issued was 10%. Any discount or premium is amortized using the effectiveinterest method.

Prepare journal entries on:January 1, 2017July 1, 2017December 31, 2017, the fiscal year end

Answer 1

January 1, 2017

Dr. Cash $844,020

Dr. Discount on Bond $55,980

Cr. Bond Payable $900,000

July 1, 2017

Dr. Interest Expense $43,299

Dr. Discount on Bond $2,799

Cr. Interest on Bond Payable $40,500

December 31, 2017

Dr. Interest Expense $43,299

Dr. Discount on Bond $2,799

Cr. Interest on Bond Payable $40,500

Step-by-step explanation:

The bond is issued on discount when the bond issuance proceeds are less than the face value of the bond. The discount is expensed over the bond period until maturity. It is added to the interest expense value to expense it.

Sale Proceeds = $900,000 x 93.78% = $844,020

Discount on the bond = Face value - cash proceeds = $900,000 - $844,020 = $55,980

This Discount will be amortized over the bond's life till maturity and added to interest expense.

Amortization = $55,980 / 10 years = 5,598 per year = $2,799 per six months

Coupon Payment = Face Value x Coupon Rate = $900,000 x 9% = $81,000 per years = $40,500 per six months

Interest Expense = $40,500 + $2,799 = $43,299