Question

Cortez Company issued $180,000, 11%, 10-year bonds on December 31, 2018, for $170,000. Interest is payable semiannually on June 30 and December 31. Cortez uses the straight-line method of amortization.

Prepare the journal entries to record:

a) The issuance of the bonds.

b) The payment of interest and the discount amortization on June 30, 2019.

c) The payment of interest and the discount amortization on December 31, 2019.

d) The retirement of the bonds at maturity, assuming interest for the last interest period has been paid and recorded.

Answer 1

When the bond is issued at discount or premium it needs to be written off during its life.

Straight-line amortization is a method of allocating discount to a bond equally throughout its life. This method amortizes the premium/discount over the life of the bond similar to the straight-line method of depreciation.

To amortize the discount, first, we need to calculate the amortization discount to be written off with every semi annual interest payments:

Particulars		Amount
Face Value of 11% Bonds	A	$180,000
Issue Value of 10% Bonds	B	$170,000
Discount on issue	C=A-B	$10,000
Period = 10 Years i.e. 20 Semi annual	D	20
Semiannual amortization amount	E=C/D	$500

(a) Journal Entry for issuance of the bonds:

Date	Account and explanations	Debit	Credit
Dec .31, 2018	Cash	$170,000
	Discount on Bonds Payable	$10,000
	Bonds Payable		$180,000
(To Record issuance of Bonds)

(b) Journal Entry for payment of interest and the discount amortization on June 30, 2019.

June .30, 2019	Interest Expense	$10,400
	Discount on Bonds Payable		$500
	Cash		$9,900*
(To Record issuance of Bonds)
(* Interest to be paid = $180,000*11%/2 = $9,900)

(c) Journal Entry for payment of interest and the discount amortization on December 30, 2019.

Date	Account and explanations	Debit	Credit
Dec .31, 2019	Interest Expense	$10,400
	Discount on Bonds Payable		$500
	Cash		$9,900*
(To Record issuance of Bonds)
(* Interest to be paid = $180,000*11%/2 = $9,900)

(d) Journal Entry for the retirement of the bonds:

Date	Account and explanations	Debit	Credit
Dec .31, 2028	Bonds Payable	$180,000
	Cash		$180,000
(To Record Redemption of Bonds)