Question

A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 20X9. Interest is paid on July 1and January 1. The proceeds from the bond issue amount to $14,703,109. The company uses the effective interest method for amortization and has fiscal year end of December 31.

Prepare the journal entries for the following dates: 01/01/20X9 and 12/31/20X9 .

Answer 1

• Before recording those two journal entries, we must prepare a amortisation schedule of Discount on Effective Interest Method

Date	Cash Interest 7.8% of face value	Interest Expense 8% of carrying value	Discount amortised	Carrying Value of Bonds payable
01/01/20X9 = issued				$               14,703,109
07/01/20X9	$             585,000	$              588,124	$                   3,124	$               14,706,233
12/31/20X9	$             585,000	$              588,249	$                   3,249	$               14,709,482

• Journal entries asked of the two dates

Date	Accounts title	Debit	Credit
01/01/20X9	Cash	$                14,703,109		[Cash proceeds received]
	Discount on Bonds Payable	$                      296,891		[Amount of discount]
	Bonds Payable		$        15,000,000	[face Value]
	(Bonds payable issued)
12/31/20X9	Interest Expense	$                      588,249		[14706233 x 8% x 6/12]
	Discount on Bonds Payable		$                   3,249	[Discount amortised]
	Interest payable		$              585,000	[15000000 x 7.8% x 6/12]
	(Interest accrued to be paid next year)