Question

Problem 14-2A Straight-Line: Amortization of bond discount LO P1, P2

Hillside issues $2,900,000 of 9%, 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 $2,505,923.

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

Solution 1:

Journal Entries - Hillside
Date	Particulars	Debit	Credit
01-Jan-17	Cash A/c Dr	$25,05,923.00
	Discount on bond Payable Dr	$3,94,077.00
	To bonds payable		$29,00,000.00
	(Tor record bond issuance)

Solution 2(a):

Computation of Semiannual cash interest payment
Par (maturity Value)	Annual Rate	Semiannual period	Semiannual cash interest payment
$29,00,000.00	9%	2	$1,30,500.00

Solution 2(b):

Computation of Semiannual discount amortization
Bond Price	Par (maturity Value)	Discount on bond payable	Semiannual periods	Straight line Discount amortization
$25,05,923.00	$29,00,000.00	$3,94,077.00	30	$13,135.90

Solution 2(c):

Computation of bond interest expense
Semiannual cash payment	Discount amortization	Bond Interest Expense
$1,30,500.00	$13,135.90	$1,43,635.90

Solution 3:

Total bond interest expense over the life of bond
Particulars	Amount
Amount Repaid:
30 semiannual interest payments of $130500 each	$39,15,000.00
Par Value at Maturity	$29,00,000.00
Total Repaid	$68,15,000.00
Less: Amount borrowed	$25,05,923.00
Total bond interest expense	$43,09,077.00

Solution 4:

First two years amortization table using straight line method
Semiannual period end	Discount Amortized	Unamortized discount	Carrying value of bond
01-Jan-17		$3,94,077.00	$25,05,923.00
30-Jun-17	$13,135.90	$3,80,941.10	$36,19,058.90
31-Dec-17	$13,135.90	$3,67,805.20	$36,32,194.80
30-Jun-18	$13,135.90	$3,54,669.30	$36,45,330.70
31-Dec-18	$13,135.90	$3,41,533.40	$36,58,466.60

Solution 5:

Journal Entries - Hillside
Date	Particulars	Debit	Credit
30-Jun-17	Interest Expense Dr	$1,43,635.90
	To Cash		$1,30,500.00
	To Discount on bond payable		$13,135.90
	(Being first semiannual interest payment made and discount amortized)
31-Dec-17	Interest Expense Dr	$1,43,635.90
	To Cash		$1,30,500.00
	To Discount on bond payable		$13,135.90
	(Being Second semiannual interest payment made and discount amortized)