On January 1, 2019, Schultz Corporation issued a $100,000, 6% bond payable (7% market rate). The...

On January 1, 2019, Schultz Corporation issued a $100,000, 6% bond payable (7% market rate). The bonds were dated January 1, 2019, pay interest each December 31, and mature in five years.

Requirements (hint: use the table from problem 1 for computations):

a. Give the journal entry to record the issuance of the bonds.

b. Give the journal entry to record the interest payment on December 31, 2019, assuming straight-line amortization.

c. Give the journal entry to record the interest payment on December 31, 2019, assuming effective interest amortization.

Solutions

Expert Solution

Face Value of Bonds =$100,000

Annual Coupon Rate = 6.00%
Annual Coupon = 6.00% * $100,000
Annual Coupon = $6,000

Annual Interest Rate = 7.00%
Time to Maturity = 5 years

Issue Value of Bonds = $6,000 * PVA of $1 (7.00%, 5) + $100,000 * PV of $1 (7.00%, 5)
Issue Value of Bonds = $6,000 * 4.100 + $100,000 * 0.713
Issue Value of Bonds = $95,900

Discount on Bonds Payable = Face Value of Bonds - Issue Value of Bonds
Discount on Bonds Payable = $100,000 - $95,900
Discount on Bonds Payable = $4,100

Answer a.

Answer b.

Annual Amortization of Discount = Discount on Bonds Payable / Time to Maturity
Annual Amortization of Discount = $4,100 / 5
Annual Amortization of Discount = $820

Annual Interest Expense = Annual Coupon + Annual Amortization of Discount
Annual Interest Expense = $6,000 + $820
Annual Interest Expense = $6,820

Answer c.

Interest Expense = Issue Value of Bonds * Annual Interest Rate
Interest Expense = $95,900 * 7.00%
Interest Expense = $6,713

ekkarill92 answered 1 year ago

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