Question

Exercise 10-2 Straight-Line: Amortization of bond discount LO P2 Tano issues bonds with a par value of $180,000 on January 1, 2017. The bonds' annual contract rate is 8%, and interest is paid semiannually on June 30 and December 31. The bonds mature in three years. The annual market rate at the date of issuance is 10%, and the bonds are sold for $170,862. 1. What is the amount of the discount on these bonds at issuance

Answer 1

bonds' face value $180,000

coupon rate 8%, semiannual = 4%

maturity 3 years x 2 = 6 periods

market interest rate = 10% or 5% semiannual

the journal entry to record the issuance of the bonds:

January 1, 2017, bonds issued at a discount

Dr Cash 170,862

Dr Discount on bonds payable 9,138

Cr Bonds payable 180,000

the amortization of the bond discount should be $9,138 / 6 = $1,523 on every coupon payment.

Journal entry to record payment of first coupon:

June 30, 2017, first coupon payment

Dr Interest expense 8,723

Cr Cash 7,200

Cr Discount on bonds payable 1,523