Question

On 1/1/19, $400,000 of 10 year, 8% bonds were issued for $350,155. The issue
price was based on an effective interest rate of 10%. Interest payment dates are
6/30 and 12/31 of each year. On 1/1/20, the bonds were retired at 96.

INSTRUCTIONS

A: Journalize the issuance of the bonds on 1/1/19.

B: Journalize the entries that should be made on 6/30/19 and 12/31/19 under the
straight line amortization method.

C: Journalize the entry that should be made on 6/30/19 under the effective
interest method. (show calculations)

D: Journalize the entry that should be made on 12/31/19 under the effective
interest method. (show calculations)

E: Journalize the retirement of the bonds on 1/1/20 (show calculations).
Assume use of the effective interest method.

Answer 1

Amort Chart
Date	Cash int	Int. Exp	Discount	Unamortized	Carrying
			Amortized	discount	value of bonds
01.01.19				49845	350155
30.06.19	16000	17508	1508	48337	351663
31.12.19	16000	17583	1583	46754	353246
Journal entries
S.no.	Accounts title and explanations		Debit $	Credit $
a.	Cash account			350155
	Discount on bonds payable		49845
	Bonds payable				400000
	(for issuance of bonds)
b.
30.06.19	Interest expense			18492
	Discount on bonds payable (49845/20)		2492
	Cash account	(400,000*8%*6/12)		16000
	(fo interest expense)
31.12.19	Interest expense			18492
	Discount on bonds payable (49845/20)		2492
	Cash account	(400,000*8%*6/12)		16000
	(fo interest expense)
c.
30.06.19	Interest expense			17508
	Discount on bonds payable			1508
	Cash account				16000
	(fo interest expense)
d.
31.12.19	Interest expense			17583
	Discount on bonds payable			1583
	Cash account				16000
	(fo interest expense)
e.
01.01.20	Bonds payable			4,00,000
	Loss on redemption of bonds		30,754
	Discount on bonds payable			46754
	Cash account (400000*96%)			384000
	(for redemption of bonds)