Question

Hillside issues $1,800,000 of 7%, 15-year bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. The bonds are issued at a price of $1,555,401.

Required:

1. Prepare the January 1, 2017, journal entry to record the bonds’ issuance.
2(a) For each semiannual period, complete the table below to calculate the cash payment.
2(b) For each semiannual period, complete the table below to calculate the straight-line discount amortization.
2(c) For each semiannual period, complete the table below to calculate the bond interest expense.
3. Complete the below table to calculate the total bond interest expense to be recognized over the bonds' life.
4. Prepare the first two years of an amortization table using the straight-line method.
5. Prepare the journal entries to record the first two interest payments.

Answer 1

1.

Date	General journal	Debit	Credit
01-01-2017	Cash	1,555,401.00
	Discount on Bonds Payable	244,599.00
	Bonds Payable		1,800,000.00

2.

Semi Annual Interest payment = 1,800,000 x 7% x 1/2 = 63,000

2b.

Bond Price	Par	Discount on Bonds Payable	SemiAnnual Periods	Straight Line Amortization
1,555,401.00	1,800,000.00	244,599.00	30.00	8,153.30

2c.

SemiAnnual Cash Payment	Discount Amoritzation	Bonds interest Expense
63,000.00	8,153.30	71,153.30

3.

Amount Repaid:
30 semi annual interest payments of 63,000 each	1,890,000.00
Par Value at Maturity	1,800,000.00
Total Amount Repaid	3,690,000.00
Less Amount Borrowed	1,555,401.00
Total Bond interest Expense	2,134,599.00

4.

Period End	Unamortized Discount	Carrying Value of Bond
01-01-2017	244,599.00	1,555,401.00
30-06-2017	236,446.00	1,563,554.00
31-12-2017	228,293.00	1,571,707.00
30-06-2018	220,140.00	1,579,860.00
31-12-2018	211,987.00	1,588,013.00

5.

Date	General journal	Debit	Credit
30-06-2017	Interest Expense	71,153.00
	Discount on Bonds Payable		8,153.00
	Cash		63,000.00
31-12-2017	Interest Expense	71,153.00
	Discount on Bonds Payable		8,153.00
	Cash		63,000.00