Question

Pretzelmania, Inc., issues 6%, 10-year bonds with a face amount of $52,000 for $48,348 on January 1, 2018. The market interest rate for bonds of similar risk and maturity is 7%. Interest is paid annually on December 31. 1. & 2. Record the bond issue and first interest payment on December 31, 2018.

Answer 1

Solution:

Date	Account titles and Explanation	Debit	Credit
Jan. 1, 2018	Cash	$              48,348
	Discount on Bands Payable	$                 3,652
	Bonds Payable		$                52,000
	( To record bonds issue)
Dec. 31, 2018	Interest Expense	$                 3,384
	Discount on Bonds Payable		$                      264
	Cash		$                  3,120
	( To record interest expense paid)

Working:

BOND DISCOUNT AMORTIZATION
EFFECTIVE-INTEREST METHOD-ANNUAL INTEREST PAYMENTS
Annual Interest Periods	Interest to Be Paid	Interest Expense to Be Recorded	Discount Amortization	Unamortized Discount	Bonds Carrying Amount
1/1/2018				$                           3,652	$                           48,348
31/12/2018	$               3,120	$                         3,384	$                       264	$                           3,388	$                           48,612
31/12/2019	$               3,120	$                         3,403	$                       283	$                           3,105	$                           48,895
31/12/2020	$               3,120	$                         3,423	$                       303	$                           2,802	$                           49,198
31/12/2021	$               3,120	$                         3,444	$                       324	$                           2,478	$                           49,522
31/12/2022	$               3,120	$                         3,467	$                       347	$                           2,132	$                           49,868
31/12/2023	$               3,120	$                         3,491	$                       371	$                           1,761	$                           50,239
31/12/2024	$               3,120	$                         3,517	$                       397	$                           1,364	$                           50,636
31/12/2025	$               3,120	$                         3,545	$                       425	$                              940	$                           51,060
31/12/2026	$               3,120	$                         3,574	$                       454	$                              485	$                           51,515
31/12/2027	$               3,120	$                         3,605	$                       485	$                                   0	$                           52,000