Question

On January 1, 2016, Lamb Services issued $200,000, 9%, four-year bonds. Interest is paid semiannually on June 30 and December 31. The bonds were issued at $193,537 when the market rate was 10%.

Required:

1. Prepare an amortization schedule that determines interest at the effective interest rate.

2. Prepare an amortization schedule by the straight-line method.

3. Prepare the journal entries to record interest expense on June 30, 2018, by each of the two approaches.

Answer 1

1)	Date	Cash	interest	Discount	Carrying
		interest	expense	amortized	value
	1/1/2016				193,537
	6/30/2016	9000	9677	677	194,214
	12/31/2016	9000	9711	711	194,925
	6/30/2017	9000	9746	746	195,671
	12/31/2017	9000	9784	784	196,454
	6/30/2018	9000	9823	823	197,277
	12/31/2018	9000	9864	864	198,141
	6/30/2019	9000	9907	907	199,048
	12/31/2019	9000	9952	952	200,000
2)	Date	Cash	interest	Discount	Carrying
		interest	expense	amortized	value
	1/1/2016				193,537
	6/30/2016	9000	9808	808	194,345
	12/31/2016	9000	9808	808	195,153
	6/30/2017	9000	9808	808	195,961
	12/31/2017	9000	9808	808	196,769
	6/30/2018	9000	9808	808	197,576
	12/31/2018	9000	9808	808	198,384
	6/30/2019	9000	9808	808	199,192
	12/31/2019	9000	9808	808	200,000
3)	Date	Account titles & explanations				Debit	Credit
	6/30/2018	interest expense				9823
		discount on bonds payable					823
		cash					9000
	6/30/2018	interest expense				9808
		discount on bonds payable					808
		cash					9000