Question

On January 1, 2016, Knorr Corporation issued $800,000 of 6%, 5-year bonds dated January 1, 2016. The bonds pay interest annually on December 31. The bonds were issued to yield 7%. Bond issue costs associated with the bonds totaled $18,848.31.

Required:

Prepare the journal entries to record the following:

January 1, 2016, Sold the bonds at an effective rate of 7%

December 31, 2016, First interest payment using the effective interest method

December 31, 2016, Amortization of bond issue costs using the straight-line method

December 31, 2017, Second interest payment using the effective interest method

December 31, 2017, Amortization of bond issue costs using the straight-line method

Answer 1

Solution:

Computation of bond price
Table values are based on:
n=	5
i=	7%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.712986	$800,000.00	$570,389
Interest (Annuity)	4.100197	$48,000.00	$196,809
Price of bonds			$767,198

Bond Amortization Schedule
Period	Cash Paid	Interest Expense	Discoount Amortized	Unamortized Discount	Carrying Value
1-Jan-16				$32,802	$767,198
31-Dec-16	$48,000	$53,704	$5,704	$27,098	$772,902
31-Dec-17	$48,000	$54,103	$6,103	$20,995	$779,005
31-Dec-18	$48,000	$54,530	$6,530	$14,465	$785,535
31-Dec-19	$48,000	$54,987	$6,987	$7,477	$792,523
31-Dec-20	$48,000	$55,477	$7,477	$0	$800,000

Journal Entries - Knorr Corporation
Date	Particulars	Debit	Credit
1-Jan-16	Cash Dr	$767,198.00
	Discount on issue of bond Dr	$32,802.00
	To Bond Payable		$800,000.00
	(To record issue of bond at discount)
1-Jan-16	Bond Issue expense Dr	$18,848.31
	To Cash		$18,848.31
	(To record bond issue expense)
31-Dec-16	Interest expense Dr ($767,198*7%)	$53,704.00
	To Cash		$48,000.00
	To Discount on issue of bond		$5,704.00
	(To record interest expense and discount amortization)
31-Dec-16	Interest expense Dr	$3,769.66
	To Bond Issue Expense ($18,848.31/5)		$3,769.66
	(To amortized bond issue cost)
31-Dec-17	Interest expense Dr	$54,103.00
	To Cash		$48,000.00
	To Discount on issue of bond		$6,103.00
	(To record interest expense and discount amortization)
31-Dec-17	Interest expense Dr	$3,769.66
	To Bond Issue Expense ($18,848.31/5)		$3,769.66
	(To amortized bond issue cost)