Question
In: Accounting
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.
Solutions
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 1 week agoRelated Solutions
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