Question

On january 1, 2016, Knorr Corporation issued $1,000,000 or 9%, 5-year bonds dated January 1, 2016. The bonds pay interest on December 31. The bonds were issued to yield 10%. Bond issue costs associated with the bonds totaled $18,000.

Prepare the journal entries to record the following:

January 1, 2016: Sold the bonds at an effective rate      of 10%
December 21, 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 rising the straight line method

Answer 1

Date	Account title and explanation	Debit	Credit
Jan 1,2019	Cash	$962,092
	Discount on bonds payable	$37,908
	Bonds payable		$1,000,000
	[Cash received for bonds payable]
Jan 1,2019	Bond issuance costs	$18,000
	Cash		$18,000
	[To record issuance of debt costs]
Dec 31,2016	Interest expense	$96,209
	Discount on bonds payable		$6,209
	Cash		$90,000
	[To record payment of interest expense]
Dec 31,2016	Bond insurance expense [18,000/5]	$18,000
	Bonds issuance costs		$18,000
	[To record amortization of bonds issue costs]
Dec 31,2017	Interest expense	$96,830
	Discount on bonds payable		$6,830
	Cash		$90,000
	[To record payment of interest expense]
Dec 31,2017	Bond issuance expense [18,000/5]	$18,000
	Bonds issuance costs		$18,000
	[To record amortization of bonds issue costs]

Note: for the first two entries, you can use single entry as follows,

Jan 1,2019	Cash	$944,092
	Discount on bonds payable	$37,908
	Bond issuance costs	$18,000
	Bonds payable		$1,000,000
	[Cash received for bonds payable]

Calculations:

i. Present value of the bonds:

Present value of Interest payments	$341,171
[$90,000 x 3.790787 Present value annuity factor (10%, 5 years)
Present value of face value	$620,921
[$1,000,000 x 0.620921 Present value ordinary factor (10%, 5 years)
Total present value of the bonds	$962,092

ii. Interest table:

Date	Interest payment	Interest expense	Discount amortization	Carrying Value
Jan 1,2016				$962,092*
Jan 1,2016	$90,000	$96,209	$6,209	$968,301
Jan 1,2017	$90,000	$96,830	$6,830	$975,131
Jan 1,2018	$90,000	$97,513	$7,513	$982,644
Jan 1,2019	$90,000	$98,264	$8,264	$990,909
Jan 1,2020	$90,000	$99,091	$9,091	$1,000,000

*Present value of bonds payable

Interest payment = $1,000,000 x 9% = $90,000

Interest expense = Preceding carrying value = 10%

Discount amortized = Interest expense - Interest payment

Carrying value = Preceding carrying value + Discount amortized.