Question

On January 1, 2018, Purellis Corporation issues 3-year $200,000 bonds at 97. The stated rate was 10% and the effective rate was 12%. Interest is payable semiannually on June 30 and December 31.

Prepare an amortization schedule for the first two interest payments using the straight-line method

. Prepare the entry for the first interest payment. You MUST show all calculations. Round to the nearest whole dollar. Do not forget journal entry descriptions.

Answer 1

• All working forms part of the answer
• Workings

Date	Accounts title	Debit	Credit
01-Jan-18	Cash [200000 x 97/100]	$194,000
	Discount on Bonds Payable	$6,000
	Bonds Payable		$200,000
	(to record issuance of Bonds)

A	Total Discount	$6,000
B	No. of interest payments	6
C = A/B	Straight Line amortisation	$1,000

• Requirement 1: Amortisation table

Period	Cash Payment	Interest Expense	Discount on Bonds Payable AMORTISED	Discount on Bonds Payable balance	Carrying Value
At Issue				$6,000	$194,000
30-Jun-18	$10,000	$11,000	$1,000	$5,000	$193,000
31-Dec-18	$10,000	$11,000	$1,000	$4,000	$192,000

• Requirement 2: Interest payment journal entry

Date	Accounts title	Debit	Credit
30-Jun-18	Interest Expense	$11,000
	Discount on Bonds Payable		$1,000
	Cash [200000 x 10% x 6/12]		$10,000
	(first interest payment made)