Question

On January 1, 2016, Knorr Corporation issued $1,400,000 of 6%, 5-year bonds dated January 1, 2016. The bonds pay interest annually on December 31. The bonds were issued to yield 7%. Bond issue costs associated with the bonds totaled $27,560.53.

Required: Prepare the journal entries to record the following:

January 1, 2016 Sold the bonds at an effective rate of 7%

December 31, 2016 First interest payment using the effective interest method

December 31, 2016 Amortization of bond issue costs using the straight-line method

December 31, 2017 Second interest payment using the effective interest method

December 31, 2017 Amortization of bond issue costs using the straight-line method

Answer 1

Solution:

Computation of bond price
Table values are based on:
n=	5
i=	7%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.712986	$1,400,000.00	$998,181
Interest (Annuity)	4.100197	$84,000.00	$344,417
Price of bonds			$1,342,597

Bond Amortization Schedule
Period	Cash Paid	Interest Expense	Discount Amortized	Unamortized Discount	Carrying Value
1-Jan-16				$57,413.00	$1,342,597.00
31-Dec-16	$84,000.00	$93,981.79	$9,981.79	$47,431.21	$1,352,578.79
31-Dec-17	$84,000.00	$94,680.52	$10,680.52	$36,750.69	$1,363,259.31
31-Dec-18	$84,000.00	$95,428.15	$11,428.15	$25,322.54	$1,374,687.46
31-Dec-19	$84,000.00	$96,228.12	$12,228.12	$13,094.42	$1,386,915.58
31-Dec-20	$84,000.00	$97,084.09	$13,084.09	$10.33	$1,399,999.67

Journal Entries - Knorr Corporation
Date	Particulars	Debit	Credit
1-Jan-16	Cash Dr	$1,342,587.00
	Discount on issue of bond Dr	$57,413.00
	To Bond Payable		$1,400,000.00
	(To record issue of bond at discount)
1-Jan-16	Bond Issue expense Dr	$27,560.53
	To Cash		$27,560.53
	(To record bond issue expense)
31-Dec-16	Interest expense Dr	$93,981.79
	To Cash		$84,000.00
	To Discount on issue of bond		$9,981.79
	(To record interest expense and discount amortization)
31-Dec-16	Interest expense Dr	$5,512.11
	To Bond Issue Expense ($27,560.53/5)		$5,512.11
	(To amortized bond issue cost)
31-Dec-17	Interest expense Dr	$94,680.52
	To Cash		$84,000.00
	To Discount on issue of bond		$10,680.52
	(To record interest expense and discount amortization)
31-Dec-17	Interest expense Dr	$5,512.11
	To Bond Issue Expense ($20,058.17/5)		$5,512.11
	(To amortized bond issue cost)