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

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

Annual interest paid: $1800000

Discount amortized: $207065

Interest expense for first year: $2007065

ekkarill92 answered 1 year ago

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