Question

On January 1, 2018, Irik Corporation issued $1,700,000 face value, 7%, 10-year bonds at $1,585,929. This price resulted in an effective-interest rate of 8% on the bonds. The bonds pay annual interest, each January 1.

Prepare the journal entry to record the issue of the bonds on January 1, 2018. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

	Account Titles and Explanation	Debit	Credit
Jan. 1, 2018	enter an account title to record the issue of the bonds on January 1, 2018	enter a debit amount	enter a credit amount
	enter an account title to record the issue of the bonds on January 1, 2018	enter a debit amount	enter a credit amount

eTextbook and Media

List of Accounts

  

  

Prepare an amortization table through December 31, 2021 (three interest periods) for this bond issue. December 31 is the company’s year-end. (Round answers to the nearest whole dollar, e.g. 5,275.)

IRIK CORPORATION Bond Discount Amortization Effective-Interest Method - Annual Interest Payments
Annual Interest Periods	Interest to Be Paid	Interest Expense to Be Recorded	Discount Amor- tization	Unamor- tized Discount	Bond Carrying Amount
Issue date—Jan. 1/18				$enter a dollar amount rounded to the nearest whole	$enter a dollar amount
1 - Jan. 1/19	$enter a dollar amount	$enter a dollar amount	$enter a dollar amount	enter a dollar amount	enter a dollar amount
2 - Jan. 1/20	enter a dollar amount	enter a dollar amount	enter a dollar amount	enter a dollar amount	enter a dollar amount
3 - Jan. 1/21	enter a dollar amount	enter a dollar amount	enter a dollar amount	enter a dollar amount	enter a dollar amount

eTextbook and Media

List of Accounts

  

  

Prepare the journal entry to record the accrual of interest and the amortization of the discount on December 31, 2018. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to the nearest whole dollar, e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
Dec. 31, 2018	enter an account title for the journal entry on December 31, 2018	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on December 31, 2018	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on December 31, 2018	enter a debit amount	enter a credit amount

eTextbook and Media

List of Accounts

  

  

Prepare the journal entry to record the payment of interest on January 1, 2019. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to the nearest whole dollar, e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
Jan. 1, 2019	enter an account title to record the payment of interest on January 1, 2019	enter a debit amount	enter a credit amount
	enter an account title to record the payment of interest on January 1, 2019	enter a debit amount	enter a credit amount

eTextbook and Media

List of Accounts

  

  

Prepare the journal entry to record the accrual of interest and the amortization of the discount on December 31, 2019. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to the nearest whole dollar, e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
Dec. 31, 2019	enter an account title for the journal entry on December 31, 2019	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on December 31, 2019	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on December 31, 2019	enter a debit amount	enter a credit amount

Answer 1

Solution:

Requirement 1:

Date	Account titles and Explanation	Debit	Credit
Jan. 1, 2018	Cash	$        1,585,929
	Discount on Bands Payable [1700000 - 1585929]	$            114,071
	Bonds Payable		$          1,700,000
	( To record bonds issue)

Requirement 2:

Annual Interest Periods	Interest to Be Paid	Interest Expense to Be Recorded	Discount Amortization	Unamortized Discount	Bonds Carrying Amount
1/1/2018				$                      114,071	$                     1,585,929
1/1/2019	$          119,000	$                     126,874	$                    7,874	$                      106,197	$                     1,593,803
1/1/2020	$          119,000	$                     127,504	$                    8,504	$                        97,692	$                     1,602,308
1/1/2021	$          119,000	$                     128,185	$                    9,185	$                        88,508	$                     1,611,492
1/1/2022	$          119,000	$                     128,919	$                    9,919	$                        78,588	$                     1,621,412
1/1/2023	$          119,000	$                     129,713	$                 10,713	$                        67,876	$                     1,632,124
1/1/2024	$          119,000	$                     130,570	$                 11,570	$                        56,306	$                     1,643,694
1/1/2025	$          119,000	$                     131,496	$                 12,496	$                        43,810	$                     1,656,190
1/1/2026	$          119,000	$                     132,495	$                 13,495	$                        30,315	$                     1,669,685
1/1/2027	$          119,000	$                     133,575	$                 14,575	$                        15,740	$                     1,684,260
31/12/27	$          119,000	$                     134,741	$                 15,740	$                                  -	$                     1,700,000

Requirement 3:

Date	Account titles and Explanation	Debit	Credit
Dec. 31, 2018	Interest Expense [1585929*8/100]	$            126,874
	Discount on Bonds Payable		$                  7,874
	Interest Payable [1700000*7/100]		$             119,000
	( To record interest expense payable)

Requirement 4:

Date	Account titles and Explanation	Debit	Credit
Jan. 1, 2019	Interest Payable	$            119,000
	Cash		$             119,000
	( To record interest expense paid)

Requirement 5:

Date	Account titles and Explanation	Debit	Credit
Dec. 31, 2019	Interest Expense [1593803*8/100]	$            127,504
	Discount on Bonds Payable		$                  8,504
	Interest Payable [1700000*7/100]		$             119,000
	( To record interest expense payable)

Notes:

1) Discount on Bands Payable= Face Value of Bond - Issue Price =  [1700000 - 1585929] =  114,071.

2) Interest to be paid = Face value * Coupon rate = $ 1700000 * 7% = $ 119,000

3) Interest Expense to be recorded = Carrying Cost * Effective Interest rate[8%] [ changes every year based on carrying value changes]

4) Discount Amortization = Interest Expense - Interest to be paid

5) Unamortized Discount = Discount on bonds payable - Discount Amortizated

6) Bonds Carrying Amount = Issue Price + Discount Amortization.

[Here is the sample calculation]

Annual Interest Periods	Interest to Be Paid[a]	Interest Expense to Be Recorded[b]	Discount Amortization[b-a]	Unamortized Discount	Bonds Carrying Amount
1/1/2018				1700000-1585929=114071	$                                  1,585,929
1/1/2019	1700000*7/100=119000	1585929*8/100 = 126874.32	126874-190000=7874.	114071-7874=106196	1585929 + 7874=1593803.
1/1/2020	1700000*7/100=119000	1593803*8/100=127504.2656	$                                8,504	$                                      97,692	$                                  1,602,308
1/1/2021	1700000*7/100=119000	$                                          128,185	$                                9,185	$                                      88,508	$                                  1,611,492
1/1/2022	1700000*7/100=119000	$                                          128,919	$                                9,919	$                                      78,588	$                                  1,621,412
1/1/2023	1700000*7/100=119000	$                                          129,713	$                              10,713	$                                      67,876	$                                  1,632,124
1/1/2024	1700000*7/100=119000	$                                          130,570	$                              11,570	$                                      56,306	$                                  1,643,694
1/1/2025	1700000*7/100=119000	$                                          131,496	$                              12,496	$                                      43,810	$                                  1,656,190
1/1/2026	1700000*7/100=119000	$                                          132,495	$                              13,495	$                                      30,315	$                                  1,669,685
1/1/2027	1700000*7/100=119000	$                                          133,575	$                              14,575	$                                      15,740	$                                  1,684,260
31/12/27	1700000*7/100=119000	$                                          134,741	$                              15,740	$                                               -	$                                  1,700,000