On the first day of the fiscal year, a company issues a $8,400,000, 12%, 10-year bond...

On the first day of the fiscal year, a company issues a $8,400,000, 12%, 10-year bond that pays semiannual interest of $504,000 ($8,400,000 × 12% × ½), receiving cash of $7,115,493. Journalize the first interest payment and the amortization of the related bond discount. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

Expert Solution

First we calculate effective interest rate of bond. (Compounded half yearly)

Formula: [Half yearly payment+(Maturity value of bond- Amount received )/( compounding period *2)]/(Maturity value of bond+Amount received )/2

= [504000+(8400000-7,115,493)/(10*2)]/(8400000+7,115,493)/2

=(504000+ 64225.35)/7757746.5 = 7.3246% (Close to Effective interest rate 7.5%)

Period	Payment	Interest Expense @ 7.5%	Discount Amortized	Carrying value
0				7115492
1	504000	533661.9	29661.9	7145153.9
2	504000	535886.5	31886.54	7177040.443
3	504000	538278	34278.03	7211318.476
4	504000	540848.9	36848.89	7248167.361
5	504000	543612.6	39612.55	7287779.913
6	504000	546583.5	42583.49	7330363.407
7	504000	549777.3	45777.26	7376140.662
8	504000	553210.5	49210.55	7425351.212
9	504000	556901.3	52901.34	7478252.553
10	504000	560868.9	56868.94	7535121.495
11	504000	565134.1	61134.11	7596255.607
12	504000	569719.2	65719.17	7661974.777
13	504000	574648.1	70648.11	7732622.885
14	504000	579946.7	75946.72	7808569.602
15	504000	585642.7	81642.72	7890212.322
16	504000	591765.9	87765.92	7977978.246
17	504000	598348.4	94348.37	8072326.615
18	504000	605424.5	101424.5	8173751.111
19	504000	613031.3	109031.3	8282782.444
20	504000	621208.7	117208.7	8399991.127

1.Interest Expense is calculated on the basis of last year carrying amount.

2. Discount Amortized= Interest Expense - Payment

Journal entry for first interest payment

Interest Expense A/c Dr $533662

To Discount On Bond payable $29662

To Bank $504000

( Being half yearly interest on bond paid)

ekkarill92 answered 6 months ago

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