Question

 

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.

Answer 1

 

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