Question

(Show work and Calculations)

On February 1, 2011, M&N company issued $100,000 of 5 year bonds, paying 8% interest every July 31 and January 31. The bonds sold for $92,278 reflecting the market rate at the time of 10%. Prepare all bond related journal entries that M&N should have recorded through January 31, 2012, the date of the second interest payment, supported by an amortization schedule covering that same 12-month period. Do not recalculate issuance proceeds.

Answer 1

Present value of Bond			92278
Less: face value of Bond			100000
Discount on Bond payable			7722

Fair value
Interest payment (Credit Cash) = Face value of bond * Coupon rate = 100000 *4% = 4000
Interest Expense (Debit Interest Expense) = book value of Bond for previous period * Market or Discounting rate
Amortization of bond Discount (Credit Bond Discount) = Interest Expense - Interest payment
Debit Balance in Bond Discount = Debit Balance in Bond Discount for previous period - Amortization of bond Discount
Credit Balance in Bond Payable = Face value of bond
Book value of Bond = Credit Balance in Bond Payable - Debit Balance in Bond Discount
Coupon rate = 8%/2 = 4% per semiannual and Market rate = 10%/2 = 5% per semi annual
Bond Discount Amortization Table
Debit Balance in Bond Discount at end of retirement of bond payable must be Zero.
Period	Date	Interest payment	Interest Expense @ 5%	Amortization of bond Discount	Debit Balance in Bond Discount	Credit Balance in Bond Payable	Book value of Bond
0	Feb 1, 2011				7,722	100,000	92,278
1	Jul 31, 2011	4,000	4,614	614	7,108	100,000	92,892
2	Jan 31,2012	4,000	4,645	645	6,463	100,000	93,537
3	Jul 31, 2012	4,000	4,677	677	5,786	100,000	94,214
4	Jan 31,2013	4,000	4,711	711	5,076	100,000	94,924
5	Jul 31, 2013	4,000	4,746	746	4,329	100,000	95,671
6	Jan 31,2014	4,000	4,784	784	3,546	100,000	96,454
7	Jul 31, 2014	4,000	4,823	823	2,723	100,000	97,277
8	Jan 31,2015	4,000	4,864	864	1,859	100,000	98,141
9	Jul 31, 2015	4,000	4,907	907	952	100,000	99,048
10	Jan 31,2016	4,000	4,952	952	0	100,000	100,000

Journal entries
Date	Account title	Debit	Credit
Feb 1, 2011	Cash	92,278
	Discount on Bond payable	7,722
	Bond payable		100,000
	(To record issued of bond payable at Discount.)
Jul 31, 2011	Interest expense	4,614
	Discount on Bond payable		614
	Cash		4,000
	(To record interest expense and amortization of bond Discount.)
Jan 31,2012	Interest expense	4,645
	Discount on Bond payable		645
	Cash		4,000
	(To record interest expense and amortization of bond Discount.)