Question

On January 1, 2018, Splash City issues $500,000 of 9% bonds, due in 20 years, with interest payable semiannually on June 30 and December 31 each year.

Required:

Assuming the market interest rate on the issue date is 10%, the bonds will issue at $457,102.

1. Complete the first three rows of an amortization table.

2. Record the bond issue on January 1, 2018, and the first two semiannual interest payments on June 30, 2018, and December 31, 2018.

Answer 1

SOLUTION

(1) Amortization table-

Date	Cash Paid($)	Interest expense ($)	Increase in carrying value ($)	Carrying value ($)
1/1/18				457,102
6/30/18	22,500	22,855	355	457,457
12/31/18	22,500	22,873	373	457,830

Explanation -

Cash paid = Face amount * 4.5% Stated rate

Interest expense = Carrying value * 5% Market rate

Increase in carrying value = Interest expense - Cash paid

Carrying value = Prior carrying value + Increase in carrying value

(2) Journal entries-

Date	Account titlles and Explanation	Debit ($)	Credit ($)
January 1, 2018	Cash	457,102
	Discount on bonds payable	42,898
	Bonds payable		500,000
	(To record issuance of bonds)
June 30, 2018	Interest Expense	22,855
	Discount on bonds payable		355
	Cash		22,500
	(To record first semiannual interest payments)
December 31, 2018	Interest Expense	22,873
	Discount on bonds payable		373
	Cash		22,500
	(To record second semiannual interest payments)