Question

GIT Inc Issued 60,000 of 5%, 12 year bonds payable on March 31, 20x0. The market interest rate at the date of issuance was 8%, and the GIT bonds pay interest semi annually.

1. Prepare an effective interest ammortization table for the bonds through the first three interest payments.

2. Record GIT, Incs issuance of the bonds on March 31, 20x0, and payment of the first semi annual interest amount and amortization of the bond discount on Sept 30, 20x0.

Answer 1

1 Effective interest amortization table for the bonds through first three interest payments is explained by the following table :-

Date	interest payment @2.5% on face value	interest exp. 5% of previous book value	amortization of bond discount	balance in bond discount	credit balance in bonds payable	Book value of bond
March 31, 20x0				13299	60000	46701
Sept 30, 20x0	1500 (2.5% of 60000)	1868 (4% of 46701)	368 (1868-1500)	12931 (13299-368)	60000	47069 (60000-12931)
March 31, 20x1	1500	1883	383	12548	60000	47452
Sept 30, 20x1	1500	1898	398	12150	60000	47850

2 . Journal entry for issuance of bond as on March 31, 20x0 and payment of interest and amortization for Sept 30, 20x0

Date	particulars	debit	credit
March 31, 20x0	Cash Discount on bonds payable To bonds payable (To bond issued at discount)	46701 13299	60000
Sept 30, 20x0	interest expenses To discount on bonds payable To cash (To interest paid and discount amortized as per effective interest method)	1868	368 1500