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Amortize Discount by Interest Method On the first day of its fiscal year, Ebert Company issued...

Amortize Discount by Interest Method

On the first day of its fiscal year, Ebert Company issued $18,000,000 of 5-year, 10% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 12%, resulting in Ebert Company receiving cash of $16,675,281. The company uses the interest method.

a. Journalize the entries to record the following:

1. Sale of the bonds. Round amounts to the nearest dollar. For a compound transaction, if an amount box does not require an entry, leave it blank.

2. First semiannual interest payment, including amortization of discount. Round to the nearest dollar. For a compound transaction, if an amount box does not require an entry, leave it blank.

3. Second semiannual interest payment, including amortization of discount. Round to the nearest dollar. For a compound transaction, if an amount box does not require an entry, leave it blank.

b. Compute the amount of the bond interest expense for the first year. Round amounts to the nearest dollar.

Annual interest paid

Discount amortized

Interest expense for first year

Solutions

Expert Solution

a.

Transaction Account Titles and Explanation Debit Credit
1 Cash 16675281
Discount on bonds payable 1324719
Bonds payable 18000000
(To record sale of bonds at discount)
2 Interest expense 1000517
Discount on bonds payable 100517
Cash ($18000000 x 10% x 6/12) 900000
(To record payment of first semiannual interest)
3 Interest expense 1006548
Discount on bonds payable 106548
Cash ($18000000 x 10% x 6/12) 900000
(To record payment of second semiannual interest)

Working:

Date Interest payment stated (5%) Interest Expense (6%) Amortization of bond discount Debit balance in bond discount Credit balance in bonds payable Book value of bonds
(A) (B) (C) (D)=(C)-(B) (E) (F) (G)=(F)-(E)
Issue date 1324719 18000000 16675281
1st semi-annual interest payment 900000 1000517 100517 1224202 18000000 16775798
2nd semi-annual interest payment 900000 1006548 106548 1117654 18000000 16882346

b.

Annual interest paid: $1800000

Discount amortized: $207065

Interest expense for first year: $2007065

ekkarill92 answered 1 year ago
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