Question

Presented below is a partial amortization schedule for Discount Pizza.

 

1. Record the bond issue assuming the face amount of bonds payable is $70,000.

2. Record the first interest payment.

3. Explain why interest expense increases each period.

Answer 1

1. The following will be the issuance journal entry:

	Cash a/c	$63,948
	discount on bonds payable a/c	$6,052
	............To Bonds payable a/c		$70,000
	(bond discount = $70,000 - 63,948 =>$6,052)

 

2. First interest payment :

	Interest expense a/c	$2,558
	..........To Discount on bonds payable		$108
	...........To Cash a/c	.	$2,450
	(to record interest expense on bond interest paid)

 

3. Interest expense increases each period because the carrying value of bonds increases each period.

(in other words the whole discount of $6,052 will be added to carrying value of bonds in a phased manner, such that by the time the bonds are due to redemption, the carrying value of bond will equal $70,000).

1. The following will be the issuance journal entry:

	Cash a/c	$63,948
	discount on bonds payable a/c	$6,052
	............To Bonds payable a/c		$70,000
	(bond discount = $70,000 - 63,948 =>$6,052)