Question

A company issues $4,000,000 of 6%, 15-year bonds dated January 1, 201, that pay interest semiannually on June 30 and December 31. The bonds are issued at a price of $3,456,448.

1. Prepare the January 1, 2017, journal entry to record the bonds' issuance.

2. For each semiannual period, compute the (a) cash payment, (b) the straight line amortization, and (c) bond interest expense.

3. Determine the total bond interest expense to be recognized over the bonds life.

4. Prepare the first two years of an amortization table using the straightline method.

5. Prepare the journal entries to record the first two interest payments.

Answer 1

1	Prepare the January 1, 2017, journal entry to record the bonds’ issuance.
Date	General Journal	Debit	Credit
Jan 1, 2015	Cash	3,456,448
	Discount on bonds payable	543,552
	Bonds payable		4,000,000
2(a)	For each semiannual period, complete the table below to calculate the cash payment.
	Par (maturity) value		Annual Rate		Year		Semiannual cash interest payment
	$4,000,000	x	6%	x	6/12	=	$120,000
2(b)	For each semiannual period, complete the table below to calculate the straight-line premium amortization.
	Par (maturity) value		Bonds price		Discount on Bonds Payable		Semiannual periods		Straight-line premium amortization
	$4,000,000	-	$3,456,448	=	$543,552	÷	30	=	$18,118
2(c)	For each semiannual period, complete the table below to calculate the bond interest expense.
	Semiannual cash payment		Discount amortization		Bond interest expense
	$120,000	+	$18,118	=	$138,118
3	Determine the total bond interest expense to be recognized over the bonds life.
	Total bond interest expense over life of bonds:
	Amount repaid:
	30	payments of	$120,000	$3,600,000
	Par value at maturity			4,000,000
	Total repaid			7600000
	Less amount borrowed			-3,456,448
	Total bond interest expense			4,143,552
4.	Prepare the first two years of an amortization table using the straight-line method.
	Semiannual Period-End	Unamortized Discount	Carrying Value
	1/1/2017	$543,552	$3,456,448
	6/30/2017	525,434	3,474,566
	12/31/2017	507,316	3,492,684
	6/30/2018	489,198	3,510,802
	12/31/2018	471,080	3,528,920
5	Prepare the journal entries to record the first two interest payments.
Date	General Journal	Debit	Credit
Jun 30, 2017	Bond interest expense	138,118
	Discount on bonds payable		18,118
	Cash		120,000
Dec 31, 2017	Bond interest expense	138,118
	Discount on bonds payable		18,118
	Cash		120,000