Question

On December 31, 2011, Daggett Company issued $850,000 of ten-year, 9% bonds payable for $800,232, yielding an effective interest rate of 10%. Interest is payable semiannually on June 30 and December 31. Prepare journal entries to reflect (a) the issuance of the bonds, (b) the semiannual interest payment and discount amortization (effective interest method) on June 30, 2012, and (c) the semiannual interest payment and discount amortization on December 31, 2012. Round amounts to the nearest dollar.

Answer 1

Required journal entries are as prepared below:

Year	Particulars	L.F	Debit ($)	Credit ($)
2011
Dec-31	Cash		800,232
	Unamortized Bond Discount		49,768
	Bond payable			850,000
	(for bond issued for 10 years)
2012	Particulars	L.F	Debit ($)	Credit ($)
Jun-30	Interest expense (800,232*10%*6/12)		40,012
	Unamortized Bond Discount			1,762
	Cash (850,000*9%*6/12)			38,250
	(For interest paid on 9% bonds and amortization of discount)
2012	Particulars	L.F	Debit ($)	Credit ($)
Dec-31	Interest expense (800,232+1,762)*10%*6/12)		40,100
	Unamortized Bond Discount			1,850
	Cash (850,000*9%*6/12)			38,250
	(For interest paid on 9% bonds and amortization of discount)

	A	B	C	D	E
Semiannual Interest Period	Cash Interest Paid	Bond Interest Expense	Discount amortization	Discount	Carrying Value at end of period
	850,000*9%*6/12	E*10%*6/12	B-A		E+C
0				$ 49,768.00	$800,232.00
1	$38,250	$40,012	$1,761.6	$48,006	$801,994
2	$38,250	$40,100	$1,849.7	$46,157	$803,843