Question

Problem 14-5A Straight-Line: Amortization of bond premium and discount LO P1, P2, P3

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Legacy issues $710,000 of 8.0%, four-year bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. They are issued at $621,812 and their market rate is 12% at the issue date.

1. Prepare the January 1, 2017, journal entry to record the bonds' issuance.

2. Determine the total bond interest expense to be recognized over the bonds' life.

3. Prepare a straight-line amortization table for the bonds' first two years.

4. Prepare the journal entries to record the first two interest payments

Answer 1

Journal entry for issuance:
Date	Accounts title and explanations				Debit $	Credit $
01.01.17	Cash account				621812
	Discount on Bonds payable				88188
	Bonds Payable					710000
Total Interest:
8 payments of 28,400 each				227200
Maturity amount to be paid				710000
Total repayment				937200
Less: Amount borrowed				621812
Total Interest:				315388
Total Discount on Bonds payable:				88188
Divide: Number of periods				8
Discount amortized each period				11023.5
Amort Chart:
Period	Cash Interest		Discount	Unamortized	Carrying
			Amortized	Discount	value
01.01.17				88188	621812
30.06.17	28400		11023.5	77164.5	632835.5
31.12.17	28400		11023.5	66141	643859
30.06.18	28400		11023.5	55117.5	654882.5
31.12.18	28400		11023.5	44094	665906
Journal entries
Date	Accounts title and explanations				Debit $	Credit $
30.06.17	Interest expenses				39423.5
	Cash account					28400
	Discount on Bonds payable					11023.5
31.12.17	Interest expenses				39423.5
	Cash account					28400
	Discount on Bonds payable					11023.5