Question

Accounting for Bonds Issued at a Discount On January 1, 2017, Edward Elric Ltd. issued $4,000,000, 8%, 10-year bonds at $3,508,1431. This price resulted in an effective-interest rate of 10% on the bonds. Edward Elric Ltd. uses the effective-interest method to amortize bond premium or discount. The bonds pay annual interest on January 1. Required: (Round all computations to the nearest dollar.) 1. Prepare the journal entry to record the issuance of the bonds on January 1, 2017. 2. Prepare an amortization table through December 31, 2018 (2 interest periods) for this bond issue. 3. Prepare the journal entry to record the accrual of interest and the amortization of the discount on December 31, 2017. 4. Prepare the journal entry to record the payment of interest on January 1, 2018. 5. Prepare the journal entry to record the accrual of interest and the amortization of the discount on December 31, 2018.

Answer 1

• [1]

Date	Accounts title	Debit	Credit
01-Jan-17	Cash	$3,508,431
	Discount on Bonds Payable	$491,569
	Bonds Payable		$4,000,000
	(to record issuance)

• [2]

Period	Cash Interest	Interest Expense	Discount amortised	Carrying Value
Issued				$3,508,431
31-Dec-17	$320,000	$350,843	$30,843	$3,539,274
31-Dec-18	$320,000	$353,927	$33,927	$3,573,202

• [3], [4] and [5]

Date	Accounts title	Debit	Credit
31-Dec-17	Interest Expense	$350,843
	Discount on Bonds Payable		$30,843
	Interest Payable		$320,000
	(accrual)
01-Jan-18	Interest Payable	$320,000
	Cash		$320,000
	(to recor dpayment)
31-Dec-18	Interest Expense	$353,927
	Discount on Bonds Payable		$33,927
	Interest Payable		$320,000
	(accrual)