Question

In: Accounting

journalize issuance of the bonds and the first two interest payments.

 

Question: Using the effective-interest amortization method

On December 31, 2018, when the market interest rate is 6%, Benson Realty issues

$700,000 of 6.25%, 10-year bonds payable. The bonds pay interest semiannually. Benson

Realty received $713,234 in cash at issuance.

Requirements

1. Prepare an amortization table using the effective interest amortization method for

the first two semiannual interest periods. (Round to the nearest dollar.)

2. Using the amortization table prepared in Requirement 1, journalize issuance of the bonds and the first two interest payments.

Solutions

Expert Solution

 

Step 1: Definition of bonds

The bond is a type of long-term liability that the company issues to fulfill cash needs.

Step 2: Amortization table

Date

Cash Paid

Interest Expense

Discount Amortized

Carrying Amount

12-31-2018

 

 

 

$713,234

06-30-2019

$21,875

$21,398

$477

$713,711

12-31-2019

$21,875

$21,411

$464

$714.175

 

Step 3: Journal entries and the payment of interest 

Date

Particulars

Debit

Credit

December 31, 2018

Cash

$713,234

 

 

6% Bonds Payable

 

$713,234

 

(Being issue entry of the bonds)

 

 

 

 

 

 

June 30, 2019

Interest Expense

$21,398

 

 

Premium on Bonds

$477

 

 

Cash

 

$21,875

 

(Being entry for the payment of interest)

 

 

 

 

 

 

December 31, 2019

Interest Expense

$21,411

 

 

Discount on Bonds

$464

 

 

Cash

 

$21,875

 

(Being entry for the payment of interest)

 

 

 

 

 

 

 


 

 

The carrying amount of the bond is $714,175

 

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