Question

HKUST Inc. decided to issue a bond on January 1^st, 2019 with a market interest rate of 6%. However, HKUST Inc. decided to pay a coupon rate of 8%. The “face-value” of the bond was 10,000 dollars. This bond will be due on December 31^st, 2020 and will be paid semi-annually on June 30^th, and December 31^st. HKUST Inc. uses the effective interest method.

On April 1^st, 2019, HKUST Inc. also found out that the $14,000 value of Goodwill in Clearwater Inc. is actually worth $25,000 as ClearWater’s brand popularity has increased a lot.

On Apr 30^th, 2019, HKUST Inc. receives a notice from a real estate agent that the market value of the land that it bought from ClearWater Inc. for $10,000 is now worth $25,000 even after all the usage and wear and tear that happened on the land for the 5 months since Jan 1^st, 2019. The land is expected to be used for 25 more months.

On May 15^th, 2019 HKUST Inc. gets hit with a major lawsuit from Hang Hau Inc. that accuses it of copying its patent for making screwdrivers. HKUST Inc. believes that it has a 45% chance of losing the case and would end up paying $15,000 if it lost. The case will end December 31^st, 2019.

On May 31^st, 2019 HKUST Inc. gets hit with a major lawsuit from Mong Kok Lawyers Inc. because of injuries caused to its workers who used the screwdrivers. HKUST Inc. believes that it has a 51% chance of losing the case and would end up paying $10,000 if it lost. The case will end December 31^st, 2019.

Record all journal entries between January 1^st, 2019 and December 31^st, 2020.

Answer 1

Please read step by step . Bond discount - Effective Interest method + few other Journal Entries  

Bond Amortization Schedule - Effective Interest Method
Date	Interest payment$	Interest Expenses $	Bond Payable$
Jan1'2019			10,000
Jun 30'2019	400	300	9,700
Dec 31'2019	400	291	9,409
Jun 30'2020	400	282	9,127
Dec 31'2020	400	274

Calculate of the discount on Issue of Bond
Period	Details	Amount ($)-A	PVAF(B)	Discounted Value($)(A*B)	PVAF(B)			Discount Factor ( @ 3%)
0-4	Interest	400	3.7170984	1,487	( As per Calculation		Period1	0.970874
4	Principal	10,000	1	8,885			Period2	0.942596
				10,372			Period3	0.915142
							Period4	0.888487
							Total	3.717098
Under the Effective Interest Method, the discount
is amortized over life of the Bond on the basis
of Effective Interest rate
Market rate of Interest =6%
Period Interest =6%/2		3%
Interest = 8% on $ 10,000 value A
Period will be 1/2 of above amount A			400

Date	Journal Entries	Debit ( $)	Credit ($)
Jan1'19	Cash	10,372
	Bond Payable		10,000
	Premium on Bond		372
June 30'19	Interest Expenses	300		( 6%on $10000*1/2)
	Premium on Bond	100
	cash		400	( as calculated above)
Dec 31'19	Interest Expenses	291	( as calculated above)
	Premium on Bond	109
	cash		400
Jun 30'20	Interest Expenses	282	( as calculated above)
	Premium on Bond	118
	cash		400
Dec 31'20	Interest Expenses	274	( as calculated above)
	Premium on Bond	126
	cash		400
Apr-19	Fair value of Asset	25,000
	Goodwill		14,000
	Gain on Asset		11,000
May-19	Land	15,000		( market value of land $10 k has been increased to $ 25k)
	Revaluation reserve		15,000
May 15'2019	Probability is less than 45% , No need to make provision
	and disturb PNL
May 31'2019	Lawsuit Loss	10,000
	Lawsuit Liability		10,000
	( 51% chance to lose the case)