Question

Ally Company issued $4,000,000 of 7%, 12-year bonds on January 1, 2018, for $3,731,582.  The market or effective interest rate is 9%. Interest is paid annually on each January 1^st, and the effective-interest method of amortization is to be used.  

Provide the journal entry to record issuance of these long-term bonds.  (You may or may not need all rows of this textbox).

Provide the end of the year adjusting journal entry (for Dec. 31, 2018) to record accrued Interest Expense for this bond (using the effective-interest method of amortization). (You may or may not need all rows of this textbox).

Provide the journal entry required on Jan. 1, 2019, when the interest is paid.  (You may or may not need all rows of this textbox).

Using a “T” account “post” (show) the above entries to the Discount on Bond PayableT-account. What is the account’s balance?

What is the Bond Carrying Value that would appear on Ally’s 12/31/18 Balance Sheet?

Answer 1

• All working forms part of the answer
• Requriement 1: All journal entries

Date	Accounts title	Debit	Credit
01-Jan-18	Cash	$           3,731,582
	Discount on Bonds Payable	$               268,418
	Bonds Payable		$          4,000,000
	(Bonds issued on discount)
31-Dec-18	Interest Expense [3731582 x 9%]	$               335,842
	Discount on Bonds Payable		$                55,842
	Interest Payable [4000000 x 7%]		$              280,000
	(Annual Interest due for payment)
01-Jan-19	Interest Payable	$               280,000
	Cash		$              280,000
	(Annual Interest accrued now paid in cash)

• Requirement 2: T Account and balance

Discount on Bonds payable
Beginning balance	$                         -	$                       -
1 Jan 18 [Bonds Issued]	$             268,418	$              55,842	31 Dec 18 [Discount Amortised]
	$             268,418	$              55,842
Ending Balance		$            212,576
	$             268,418	$            268,418

Account’s Balance = $ 212,576 Debit

• Requirement 3

Bonds payable [Face Value]	$         4,000,000
Less: Unamortised Balance of Discount	$            212,576
Carrying Value of Bonds on 12/31/18	$         3,787,424