Question

Problem 1

Company:                        XYZ Company

Date of bonds:                January 1, 2019

Term:                               4 years

Face (Par) Value:            $1,000

Stated interest rate:         10%

Effective interest rate:    12%

Interest payment dates on January 1 and July 1

1. Compute the market price of the bonds and journalize the issuance of the bonds.

2. Prepare a schedule to amortize the premium or discount using the effective interest method of amortization for the first year and journalize the entries to record the interest payment on July 1, 2019 and January 1 2020.

3. Interest expense for the year ended December 31, 2019 is $______________.

Answer 1

1	Market Price of bonds	$938
Date	Account Titles and Explanation	Debit	Credit
Jan 1, 2019	Cash	124,590
	Discount on Bonds Payable	3,410
	Bonds Payable		128,000
2	Date	Cash	Interest Expense	Discount Amortized	Bonds Payable, Net
	Jan 1, 2019				938
	July 1, 2019	50	56	6	944
	Jan 1, 2020	50	57	7	951
	Working
	Cash Paid = $1,000 x 10% x 1/2
	Interest Expense = $938 x 12% x 1/2
	Discount Amortized = Interest Expense - Cash Paid
3
July 1, 2019	Interest Expense	56
	Discount on Bonds Payable		6
	Cash		50
Jan 1, 2020	Interest Expense	57
	Discount on Bonds Payable		57
	Cash		50
4	$113