In: Accounting
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.
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