Question

On January 1, 2016, Knorr Corporation issued $1,100,000 of 9%, 5-year bonds dated January 1, 2016. The bonds pay interest annually on December 31. The bonds were issued to yield 10%. Bond issue costs associated with the bonds totaled $20,058.17.

Required: Prepare the journal entries to record the following:

January 1, 2016 Sold the bonds at an effective rate of 10%

December 31, 2016 First interest payment using the effective interest method

December 31, 2016 Amortization of bond issue costs using the straight-line method

December 31, 2017 Second interest payment using the effective interest method

December 31, 2017 Amortization of bond issue costs using the straight-line method

Answer 1

Solution:

Computation of bond price
Table values are based on:
n=	5
i=	10%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.620921	$1,100,000.00	$683,013
Interest (Annuity)	3.790787	$99,000.00	$375,288
Price of bonds			$1,058,301

Journal Entries - Knorr Corporation
Date	Particulars	Debit	Credit
1-Jan-16	Cash Dr	$1,058,301.00
	Discount on issue of bond Dr	$41,699.00
	To Bond Payable		$1,100,000.00
	(To record issue of bond at discount)
1-Jan-16	Bond Issue expense Dr	$20,058.17
	To Cash		$20,058.17
	(To record bond issue expense)
31-Dec-16	Interest expense Dr	$105,830.00
	To Cash		$99,000.00
	To Discount on issue of bond		$6,830.00
	(To record interest expense and discount amortization)
31-Dec-16	Interest expense Dr	$4,011.63
	To Bond Issue Expense ($20,058.17/5)		$4,011.63
	(To amortized bond issue cost)
31-Dec-17	Interest expense Dr	$106,513.00
	To Cash		$99,000.00
	To Discount on issue of bond		$7,513.00
	(To record interest expense and discount amortization)
31-Dec-17	Interest expense Dr	$4,011.63
	To Bond Issue Expense ($20,058.17/5)		$4,011.63
	(To amortized bond issue cost)