Question

On January 1, Year 1, the Diamond Association issued bonds with a face value of $225,000, a stated rate of interest of 6 percent, and a 10-year term to maturity. Interest is payable in cash on December 31 of each year. The effective rate of interest was 8 percent at the time the bonds were issued. The bonds sold for $194,805. Diamond used the effective interest rate method to amortize the bond discount.

Required
a. Determine the amount of the discount on the day of issue.
b. Determine the amount of interest expense recognized on December 31, Year 1. (Round your answer to the nearest dollar amount.)
c. Determine the carrying value of the bond liability on December 31, Year 1. (Round your answer to the nearest dollar amount.)

a.Discount=

b.Interest expense=

c.Carrying value=

    d. Provide the general journal entry necessary to record the December 31, Year 1, interest expense. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your answers to the nearest dollar amount.)

Record the interest expense.

Year 1 Debit Credit

Answer 1

a)Discount on bond issue= Face value - issue price

                = 225000-194805

                 = 30195

b) the amount of interest expense recognized on December 31, Year 1 = Carrying value of bond *market rate

                   = 194805 *8%

                   = 15584.4 (rounded to 15584 )

c)Interest paid = par value *stated rate

            = 225000 *6 %

             = 13500

Discount amortized = Interest expense -Interest paid

             = 15584 -13500

            = 2084

a)Discount = Total discount-discount amortized

             = 30195 -2084

           = 28111

b)Interest expense = 15584

c)carrying value =Face value -unamortized discount

                = 225000 -28111

                = 196889

d)

Date	Account title	Debit	credit
31 Dec Year 1	Interest expense	15584
	Discount on bond payable		2084
	cash		13500