Question

On January 1, 2017, Tamarisk Inc. sold 15% bonds having a maturity value of $890,000 for $920,555, which provides the bondholders with a 14% yield. The bonds are dated January 1, 2017 and mature on January 1, 2022, with interest payable on January 1 of each year. The company follows IFRS and uses the effective interest method.

Prepare the journal entry at the date of issue.

Prepare a schedule of interest expense and bond amortization for 2017 through 2020.

Prepare the journal entries to record the interest payment and the amortization for 2017

Answer 1

(i) Journal Entry at the date of issue (Amount in $)

Date	Account Titles	Debit	Credit
January 1, 2017	Cash	920,555
	Bonds payable		890,000
	Premium on Bonds payable (Bal.fig.)		30,555

(ii) Cash paid for interest each year = $890,000*15% = $133,500

Interest expense for 2017 = Carrying value*yield = $920,555*14% = $128,878

Schedule of interest expense and bond amortization for 2017 through 2020

Date	Cash paid	Interest expense	Premium on bonds payable written off	Carrying amount
Jan 1, 2017				920,555
Dec 31, 2017	133,500	128,878	(133,500-128,878) = 4,622	(920,555-4,622) = 915,933
Dec 31, 2018	133,500	(915,933*14%) = 128,231	(133,500-128,231) = 5,269	(915,933-5,269) = 910,664
Dec 31, 2019	133,500	(910,664*14%) = 127,493	(133,500-127,493) =6,007	(910,664-6,007) = 904,657
Dec 31, 2020	133,500	(904,657*14%) = 126,652	(133,500-126,652) = 6,848	(904,657-6,848) = 897,809

(iii) Journal entries to record interest payment and amortization for 2017 (Amt in $)

Date	Account Titles	Debit	Credit
Dec 31, 2017	Bond interest	128,878
	Premium on bonds payable (Bal.fig.)	4,622
	Cash		133,500