Question

As the controller of Lynbrook Securities, Inc., you were asked to evaluate a potential bond issuance to raise funds to expand the company’s operations. Lynbrook is considering issuing a $2 million, 5-year, 6 percent bonds payable on January 1, 2021. Interest would be payable semiannually on June 30 and December 31. Bond discounts and premiums would be amortized using the straight-line method. Requirement:

a. Prepare an amortization table for each of the 10 semiannual periods, under the following assumptions:

1. The bonds were issued at 99. (round to the nearest dollar)

2. The bonds were issued at 103. (round to the nearest dollar)

b. Prepare the journal entry to record the issuance of the bonds on January 1, 2021 if Lynbrook issued the bonds at 103.

c. Prepare the following journal entries necessary if the bonds were issued at 99:

i. Issuance of the bonds on January 1, 2021.

ii. Record the semiannual bond payment on June 30, 2021.

iii. Record the semiannual bond payment on December 31, 2021.

Answer 1

Req a.
Issued at 99
Discount = 2000,000 *1% = $20,000
Discount amortized each period = 20000/10 = 2000
Amort Chart
Date		Discount		Carrying
		Unamortized	value of bonds
01.01.21		20000		1980000
30.06.21		18000		1982000
31.12.21		16000		1984000
30.06.22		14000		1986000
31.12.22		12000		1988000
30.06.23		10000		1990000
31.12.23		8000		1992000
30.06.24		6000		1994000
31.12.24		4000		1996000
30.06.25		2000		1998000
31.12.25		0		2000000
Issued at 103.
Premium = 2000,000 *3% = 60000
Premium amortized each period = 60000/10 = 6000
Amort Chart
Date		Premium		Carrying
		Unamortized	value of bonds
01.01.21		60000		2060000
30.06.21		54000		2054000
31.12.21		48000		2048000
30.06.22		42000		2042000
31.12.22		36000		2036000
30.06.23		30000		2030000
31.12.23		24000		2024000
30.06.24		18000		2018000
31.12.24		12000		2012000
30.06.25		6000		2006000
31.12.25		0		2000000
Req b.
Journal entry
S.no.	Accounts title and explanation		Debit $	Credit $
b.	Cash				2060000
	Bonds payable				2000000
	Premium on bonds payable			60000
	(for issuance of bonds)
Req c.
Journal entry
S.no.	Accounts title and explanation		Debit $	Credit $
c-i.	Cash				1980000
	Discount on bonds payable		20000
	Bonds payable				2000000
	(for issuance of bonds)
c-ii	Interest expense			62000
	Cash	(2000,000*6%*6/12)			60000
	Discount on bonds payable			2000
	(for interest expense)
c-iii	Interest expense			62000
	Cash	(2000,000*6%*6/12)			60000
	Discount on bonds payable			2000
	(for interest expense)