Question

ABC Company sold $1,000,000 of 5% bonds with interest due semi-annually at a market rate of 6%. They are 5 year bonds. This sale occurred January 1, 2019.

a. Provide an amortization schedule using the effective interest rate method for the entire life of the bond.

b. Show the journal entry for the January sale.

c. Show the journal entry for the first interest payment date.

NOTE: A good search term for finding examples is "effective interest rate method example" and "bond issuance price"

Answer 1

	Calculation for PV of Bonds:
	Face Value		1000000
	Annual Coupon rate		5%
	Market Rate		6%
	Years to Maturity		5
	Payment Frequency		2
	Value of Bond		$957,349
Ans.(1)	Amortisation table for bonds using the effective interest method:
	Semiannual interest Period End		Cash Int. Paid	Bond Interest Expense		Discount Amortisation	Carrying Value
	Jan-1-2019						957,349
	Jun-30-2019		25,000	28,720.47		(3,720.47)	961,069.47
	Dec-31-2019		25,000	28,832.08		(3,832.08)	964,901.55
	Jun-30-2020		25,000	28,947.05		(3,947.05)	968,848.60
	Dec-31-2020		25,000	29,065.46		(4,065.46)	972,914.06
	Jun-30-2021		25,000	29,187.42		(4,187.42)	977,101.48
	Dec-31-2021		25,000	29,313.04		(4,313.04)	981,414.52
	Jun-30-2022		25,000	29,442.44		(4,442.44)	985,856.96
	Dec-31-2022		25,000	29,575.71		(4,575.71)	990,432.67
	Jun-30-2023		25,000	29,712.98		(4,712.98)	995,145.65
	Dec-31-2023		25,000	29,854.37		(4,854.37)	1,000,000.02
	Total		250,000	292,651.02		(42,651.02)
Ans.(2)	Accounts Titles and Explanation			Dr.(Amt.)	Cr.(Amt.)
	Cash			957,349
	Discount on Bonds Payable			42,651
	To Bonds Payable				1,000,000
Ans.(3)	Accounts Titles and Explanation			Dr.(Amt.)	Cr.(Amt.)
	Interest Expense			28,720.47
	To Discount on Bonds Payable				3,720.47
	To Cash				25,000.00