Question

I.​On January 1, 2019, MUVE INC. issued $800,000, 6%, 5-year bonds for $735,110. The bonds were sold to yield an effective-interest rate of 8%. Interest is paid annually on January 1. The company uses the effective-interest method of amortization.

Instructions:

(a)​Prepare a bond discount amortization schedule which shows the amortization of discount for the first two interest payment dates. (Round to the nearest dollar).

MAUVE INC.

Bond Discount Amortization

Effective-Interest Method—Annual Interest Payments

6% Bonds Issued at 8%

Annual

Interest​Interest to​Interest​Discount​Unamortized​Carrying Value

Periods   ​  be Paid ​Expense​Amortization​Discount​   of Bonds​

Issue date

1.

2.

B. ​Prepare the journal entries that Mauve Inc. would make on January 1 and December 31, 2017 and January 1, 2018, related to the bond issue.(including explanations).

GENERAL JOURNAL J-1
	Account Title and Explanation	Ref	Debit	Credit
	Adjusting Entries

Answer 1

when the issue price of bond is lower than the face value the bond is called to be issued at discount

discount to be amortised = face value-issue price

=$800,000-$735,110

=$64,890

Annual interest periods bond issue date	Interest to be paid	Interest expense	discount amortization	Unamortized discount	Carrying value of bonds
1	$48,000[$800,000*6%]	$58,809[$735,110*8%]	$10,809[$58,809-$48,000]	$54,081[$64,890-$10,809]	$745,919[$735,110+$10,809]
2	$48,000[$800,000*6%]	$59,674[$745,919*8%]	$11,674[$59,674-48,000]	$42,407[$54,081-$11,674]	$757,593[$745,919+$11,674]

2. Journal Entry

	Account title	Debit	credit
January 1,2019	Cash	$735,110
	Discount on Bonds Payable	$64,890
	Bonds payable		$800,000
	[To record issue of 6%, 5 year bond at discount]
December 31,2019	Interest expense	$58,809
	Interest payable		$48,000
	Discount on bonds payable		$10,809
	[ To record interest expense for the year 1]
January 1,2020	Interest payable	$48,000
	Cash		$48,000
	[ To record payment of interest]

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