Question

This assignment will take some time so please don’t wait till the last minute to do it.

On July 1, 2017, Bobby's Building Corp. issued $1,000,000 of 10% bonds dated July 1, 2017 for $937,229. The bonds were sold to yield 11% and pay interest semiannually on July 1 and January 1. Bobby's Building Corp. uses the effective interest method of amortization. The company's fiscal year ends on February 28.

Required :

1.   Prepare the journal entry on July 1, 2017.

2.   Prepare the amortization table for the first two interest periods.

3.   Prepare the journal entry on January 1, 2018.

4.   Prepare the adjusting entry needed on February 28, 2018.

Round all amounts to the nearest dollar. Omit explanations for all journal entries.

Answer 1

Solution:

1) journal entry on July 1, 2017.

Date	Account Titles and Explanation	Debit	Credit
July.1, 2017	Cash	$937,229
	Discount on Bonds Payable (bal.fig)	$62,771
	Bonds Payable		$1,000,000

2) amortization table for the first two interest periods.

Schedule of Amortization of Bond DISCOUNT (Effective Rate Method)
Payment intervals	Date	Interest Expense (Carrying Value at the beginning of period x Market Interest Rate 11% * 1/2half yearly)	Cash Paid (Face Value of the Bonds $1,000,000 x Coupon Rate 10% * 1/2 half yearly)	Discount Amortization (Interest Expense - Cash Paid)	Unamortized Bond Discount	Par Value of Bonds Payable	Book Value (Par Value - Balance of Unamortized Bond Discount)
0	July.1, 2017				$62,771	$1,000,000	$937,229
1	Jan.1, 2018	$51,548	$50,000	$1,548	$61,223	$1,000,000	$938,777
2	July.1, 2018	$51,633	$50,000	$1,633	$59,591	$1,000,000	$940,409

3) journal entry on January 1, 2018

Date	Account Titles and Explanation	Debit	Credit
Jan.1, 2018	Interest Expense	$51,548
	Interest Payable		$50,000
	Discount on Bonds Payable (Amortization)		$1,548

4) adjusting entry needed on February 28, 2018

For Adjustment entry we need to calculate the 2 months expense by referring the amortization table part 2

2 Months Interest Expense = $51,633*2/6 = $17,211

2 months Coupon Interest Payable = $50,000*2/6 = $16,667

2 months Discount Amortization = 17,211 – 16,667 = $544

Date	Account Titles and Explanation	Debit	Credit
Feb.28, 2018	Interest Expense	$17,211
	Interest Payable		$16,667
	Discount on Bonds Payable (Amortization)		$544

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