Question

 

Question: Journalizing bond transactions using the effective-interest

amortization method

Journalize issuance of the bond and the first semiannual interest payment under

each of the following three assumptions. The company amortizes bond premium

and discount by the effective-interest amortization method. Explanations are not

required.

1. Seven-year bonds payable with face value of $83,000 and stated interest rate of

10%, paid semiannually. The market rate of interest is 10% at issuance. The present

value of the bonds at issuance is $83,000.

2. Same bonds payable as in assumption 1, but the market interest rate is 16%. The

present value of the bonds at issuance is $62,433.

3. Same bonds payable as in assumption 1, but the market interest rate is 8%. The

present value of the bonds at issuance is $91,727.

Answer 1

 

Step 1: Definition of bonds issued at par

When the stated interest rate is equal to the market interest rate, these bonds are known as bonds issued at par.

Step 2: Journal entries

Date	Particulars	Debit	Credit
	Cash	$83,000
	10% Bonds Payable		$83,000
	(To record the issuance of bonds)
	Interest Expense	$4,150
	Cash		$4,150
	(To record the payment of interest)

 Step 3: Journal Entries

Date	Particulars	Debit	Credit
	Cash	$62,433
	Discount on 10% Bonds Payable	$20,567
	10% Bonds Payable		$83,000
	(To record the issuance of bonds)
	Interest Expense	$4,995
	Discount on Bonds Payable		$845
	Cash		$4,150
	(To record the payment of interest)

 

Step 2: Journal entries

Date	Particulars	Debit	Credit
	Cash	$91,727
	Premium on 10% Bonds Payable		$7,727
	10% Bonds Payable		$83,000
	(To record the issuance of bonds)
	Interest Expense	$3,670
	Premium on Bonds Payable		$480
	Cash		$4,150
	(To record the payment of interest)

 

 

The amount of premium amortized on the first payment is $480.