Question

On the first day of its fiscal year, Ebert Company issued $17,000,000 of 5-year, 10% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 11%, resulting in Ebert Company receiving cash of $16,359,296. The company uses the interest method.

a. Journalize the entries to record the following:

1. Sale of the bonds. Round amounts to the nearest dollar. For a compound transaction, if an amount box does not require an entry, leave it blank.

Cash

Discount on Bonds Payable

Bonds Payable

2. First semiannual interest payment, including amortization of discount. Round to the nearest dollar. For a compound transaction, if an amount box does not require an entry, leave it blank.

Interest Expense

Discount on Bonds Payable

Cash

3. Second semiannual interest payment, including amortization of discount. Round to the nearest dollar. For a compound transaction, if an amount box does not require an entry, leave it blank.

Interest Expense

Discount on Bonds Payable

Cash

Answer 1

(A) JOURNAL ENTRY

1. Sale of Bond

Date	Journal Entry	Debit	Credit
Jan,1	Cash	$16,359,296
	Discount on Bonds payable	$640,704
	Bonds Payable		$17,000,000

(Being Transaction of Sales of Bonds have been recorded)

2. First semiannual interest payment, including amortization of discount.

Date	Journal Entry	Debit	Credit
June,30	Interest Expense	$899,761
	Discount on Bonds payable		$49,761
	Cash		$850,000

(Being amount of semiannual interest with amortization amount recorded)

3. Second semiannual interest payment, including amortization of discount.

Date	Journal Entry	Debit	Credit
Dec,31	Interest Expense	$$902,498
	Discount on Bonds payable		$52,498
	Cash		$850,000

(Being amount of semiannual interest with amortization amount recorded)

W.N. Effective Interest rate Mothod to amortize the $10,731,773 discount on bonds payable:

Interest Rate= 10/2= 5%

Date	Interest Payment =5%*17,000,000(A)	Interest Expense= 5.5%*previous Book value in (F) = (B)	Amortization of Bonds Discount = B-A= (C)	Bonds Discount (D)	Bonds Payable (E)	Book Value of Bonds= E-D= (F)
Jan,1				$640,704.00	$17,000,000.00	$16,359,296.00
June, 30	$850,000.00	$899,761.28	$49,761.28	$590,942.72	$17,000,000.00	$16,409,057.28
Dec, 30	$850,000.00	$902,498.15	$52,498.15	$538,444.57	$17,000,000.00	$16,461,555.43