Question

Exercise 4-2

On January 1, 2012, Fromer issued $3,000,000 of 12-year, 7 percent bonds. Interest is paid semi-annually on June 30 and December 31. The issue price was $2,592,000.
1.   Prepare the January 1, 2012, journal entry that records the bond issue.

2.   Compute the following for each semi-annual period:
a.   Cash payment.
b.   Straight-line discount amortization.
c.   Interest expense.

3.   Determine the total interest expense recognized over the life of the bonds.

4.   Prepare the first two years of an amortization table (use the straight-line method).

Semiannual Period-End

Unamortized Discount

Carrying Value

[Create your amortization table here.]

5.   For distinguished performance, prepare journal entries for the first two interest payments.

Answer 1

1. Journal Entry for the issuance of Bonds

01/01/2012 Cash A/c Dr. $ 2,592,000

Discount on Bonds Payable Dr.($3,000,000-$2,592,000 ) $ 408,000

To Bonds payable A/c Cr. $ 3,000,000

( to record issue of Bonds at Discount )   

  

2.

a.) Computation for cash payment for each Semi Annual period

Interest expense for each semi annual period = $ 105,000

Less : Discount ammortized for semi annual period = $ 17,000

Total Cash Payable for each semi annual period = $ 88,000

b.) Computation of Straight Line Discount ammortization

Discount on Bonds Payable = $ 408,000

This Discount is to be ammortized over the course of the life of the Bond

Life of the Bond = 12 years

Straight Line discount ammortization = $408,000/12

Straight Line Discount ammortization for a year = $34,000

Straight Line Discount ammortization for Semi Annually = $34,000*1/2= $ 17,000

c.) Computation of interest expenses is as follows :

Face value of Bond = $ 3,000,000

Interest rate = 7 %

Interest is to be calculated at the face value of Bonds.

Therefore , interest on bonds = $3,000,000*7/100= $ 210,000

Semi annual Interest = $ 210,000 *1/2 = $ 105,000

3. Determination of total interest expense recognised over the period of Bonds

Interest expense for 1 year ( as per above calculation ) = $ 210,000

Interest expense for 12 years= $ 210,000 * 12 = $ 2,520,000

4. Preparation of first two years of Ammortization Table ( using the straight line method )

Semi Annual Period End Unammortized Discount Carrying Value

01/01/2012 $ 408,000 $ 2,592,000

30/06/2012 $ 17,000 $ 2,609,000

31/12/2012 $ 17,000 $ 2,626,000

30/06/2013 $    17,000 $ 2,643,000

31/12/2013 $ 17,000 $ 2,660,000

5. Journal Entries for the first two interest payments

30/06/2012 Interest Expense Dr. $ 1,05,000

To Discount on Bonds Payable Cr. $ 17,000

To Cash Cr. $ 88,000

( to record semi annual interest payment and discount ammortization )

31/12/2012    Interest Expense Dr. $ 1,05,000

To Discount on Bonds Payable Cr. $ 17,000

To Cash Cr. $ 88,000

( to record semi annual interest payment and discount ammortization )