Question

On January 1, 2013 an entity acquires a 5-year bond for its fair value of Ksh.1,000,000.The debt instrument has a principle amount of Ksh.1,250,000 and the instrument carries a fixed interest rate at 4.72% that is paid annually. It has been determined that the effective interest rate is 10%. How should the entity account for the debt instrument over the five year term? (show your schedule of workings)

Answer 1

Journal Entries:

Date	General Journal	Debit	Credit
Jan 1, 2013	Cash	1000000
	Discount on Bond Payable	250000
	Bond Payable		1250000
Dec 31, 2013	Interest Expense	109000
	Cash		59000
	Discount on Bond Payable		50000
Dec 31, 2014	Interest Expense	109000
	Cash		59000
	Discount on Bond Payable		50000
Dec 31, 2015	Interest Expense	109000
	Cash		59000
	Discount on Bond Payable		50000
Dec 31, 2016	Interest Expense	109000
	Cash		59000
	Discount on Bond Payable		50000
Dec 31, 2017	Interest Expense	109000
	Cash		59000
	Discount on Bond Payable		50000
Dec 31, 2017	Bond Payable	1250000
	Cash		1250000

Workings:

Amortization Schedule:

Year	Cash Payment	Interest Expense	Discount Amortized	Balance of Discount on Bonds	Carrying Value of Bond
0	-	-		1250000 – 1000000 = 250000	1250000 – 250000 = 100000
1	1250000*4.72% = 59000	59000 + 50000 = 109000	250000/5 = 50000	250000 – 50000 = 200000	1250000 – 200000 = 1050000
2	1250000*4.72% = 59000	59000 + 50000 = 109000	250000/5 = 50000	200000 – 50000 = 150000	1250000 – 150000 = 1100000
3	1250000*4.72% = 59000	59000 + 50000 = 109000	250000/5 = 50000	150000 – 50000 = 100000	1250000 – 100000 = 1150000
4	1250000*4.72% = 59000	59000 + 50000 = 109000	250000/5 = 50000	100000 – 50000 = 50000	1250000 – 50000 = 1200000
5	1250000*4.72% = 59000	59000 + 50000 = 109000	250000/5 = 50000	50000 – 50000 = 0	1250000 – 0 = 1250000