Journalizing bond transactions using the effective-interest

amortization method

Journalize issuance of the bond and the first semiannual interest payment undereach of the following three assumptions. The company amortizes bond premiumand discount by the effective-interest amortization method. Explanations are notrequired.

1. Seven-year bonds payable with face value of \(83,000 and stated interest rate of10%, paid semiannually. The market rate of interest is 10% at issuance. The presentvalue of the bonds at issuance is \)83,000.

2. Same bonds payable as in assumption 1, but the market interest rate is 16%. Thepresent value of the bonds at issuance is \(62,433.

3. Same bonds payable as in assumption 1, but the market interest rate is 8%. Thepresent value of the bonds at issuance is \)91,727.

Step by step solution

01

Definition of bonds issued at par

When the stated interest rate is equal to the market interest rate, these bonds are known as bonds issued at par.

02

Journal entries

S.no.	Date	Accounts and Explanations	Debit	Credit
1,		Cash	$83,000
		10% Bonds Payable		$83,000
		(To record the issuance of bonds)
		Interest Expense	$4,150
		Cash		$4,150
		(To record the payment of interest)
2.		Cash	$62,433
		Discount on 10% Bonds Payable	$20,567
		10% Bonds Payable		$83,000
		(To record the issuance of bonds)
		Interest Expense	$4,995
		Discount on Bonds Payable		$845
		Cash		$4,150
		(To record the payment of interest)
3.		Cash	$91,727
		Premium on 10% Bonds Payable		$8,727
		10% Bonds Payable		$83,000
		(To record the issuance of bonds)
		Interest Expense	$3,670
		Premium on Bonds Payable	$480
		Cash		$4,150
		(To record the payment of interest)

03

Calculation of interest expenses (Part 1):

$\begin{array}{c}\mathbf{C}\mathbf{o}\mathbf{u}\mathbf{p}\mathbf{o}\mathbf{n}\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\mathbf{=}\mathbf{P}\mathbf{a}\mathbf{r}\mathbf{V}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}\mathbf{\times }\mathbf{C}\mathbf{o}\mathbf{u}\mathbf{p}\mathbf{o}\mathbf{n}\mathbf{R}\mathbf{a}\mathbf{t}\mathbf{e}\mathbf{\times }\mathbf{T}\mathbf{i}\mathbf{m}\mathbf{e}\mathbf{P}\mathbf{e}\mathbf{r}\mathbf{i}\mathbf{o}\mathbf{d}\\ \mathbf{=}\mathbf{\$}\mathbf{83}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{10}\mathbf{\%}\mathbf{\times }\frac{\mathbf{6}}{\mathbf{12}}\\ \mathbf{=}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{150}\end{array}$

Calculation of discount allowed and interest expenses (part 2):

$\begin{array}{c}\mathbf{D}\mathbf{i}\mathbf{s}\mathbf{c}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\mathbf{A}\mathbf{l}\mathbf{l}\mathbf{o}\mathbf{w}\mathbf{e}\mathbf{d}\mathbf{=}\mathbf{P}\mathbf{a}\mathbf{r}\mathbf{V}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}\mathbf{-}\mathbf{I}\mathbf{s}\mathbf{s}\mathbf{u}\mathbf{e}\mathbf{d}\mathbf{P}\mathbf{r}\mathbf{i}\mathbf{c}\mathbf{e}\\ \mathbf{=}\mathbf{\$}\mathbf{83}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{62}\mathbf{,}\mathbf{433}\\ \mathbf{=}\mathbf{\$}\mathbf{20}\mathbf{,}\mathbf{567}\end{array}$

$\begin{array}{c}\mathbf{D}\mathbf{i}\mathbf{s}\mathbf{c}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\mathbf{O}\mathbf{n}\mathbf{B}\mathbf{o}\mathbf{n}\mathbf{d}\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{r}\mathbf{t}\mathbf{i}\mathbf{z}\mathbf{e}\mathbf{d}\mathbf{=}\mathbf{I}\mathbf{s}\mathbf{s}\mathbf{u}\mathbf{e}\mathbf{P}\mathbf{r}\mathbf{i}\mathbf{c}\mathbf{e}\mathbf{\times }\mathbf{I}\mathbf{n}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{e}\mathbf{s}\mathbf{t}\mathbf{R}\mathbf{a}\mathbf{t}\mathbf{e}\mathbf{\times }\mathbf{P}\mathbf{e}\mathbf{r}\mathbf{i}\mathbf{o}\mathbf{d}\mathbf{-}\mathbf{C}\mathbf{o}\mathbf{u}\mathbf{p}\mathbf{o}\mathbf{n}\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\\ \mathbf{=}\mathbf{\$}\mathbf{62}\mathbf{,}\mathbf{433}\mathbf{\times }\mathbf{16}\mathbf{\%}\mathbf{\times }\frac{\mathbf{1}}{\mathbf{2}}\mathbf{-}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{150}\\ \mathbf{=}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{995}\mathbf{-}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{150}\\ \mathbf{=}\mathbf{\$}\mathbf{845}\end{array}$

$\begin{array}{c}\mathbf{I}\mathbf{n}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{e}\mathbf{s}\mathbf{t}\mathbf{E}\mathbf{x}\mathbf{p}\mathbf{e}\mathbf{n}\mathbf{s}\mathbf{e}\mathbf{s}\mathbf{=}\mathbf{D}\mathbf{i}\mathbf{s}\mathbf{c}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\mathbf{O}\mathbf{n}\mathbf{B}\mathbf{o}\mathbf{n}\mathbf{d}\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{r}\mathbf{t}\mathbf{i}\mathbf{z}\mathbf{e}\mathbf{d}\mathbf{+}\mathbf{C}\mathbf{o}\mathbf{u}\mathbf{p}\mathbf{o}\mathbf{n}\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\\ \mathbf{=}\mathbf{\$}\mathbf{845}\mathbf{+}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{150}\\ \mathbf{=}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{995}\end{array}$

Calculation of premium amount and interest expenses (part 3):

$\begin{array}{c}\mathbf{P}\mathbf{r}\mathbf{e}\mathbf{m}\mathbf{i}\mathbf{u}\mathbf{m}\mathbf{o}\mathbf{n}\mathbf{B}\mathbf{o}\mathbf{n}\mathbf{d}\mathbf{=}\mathbf{I}\mathbf{s}\mathbf{s}\mathbf{u}\mathbf{e}\mathbf{d}\mathbf{P}\mathbf{r}\mathbf{i}\mathbf{c}\mathbf{e}\mathbf{-}\mathbf{P}\mathbf{a}\mathbf{r}\mathbf{V}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}\\ \mathbf{=}\mathbf{\$}\mathbf{91}\mathbf{,}\mathbf{727}\mathbf{-}\mathbf{\$}\mathbf{83}\mathbf{,}\mathbf{000}\\ \mathbf{=}\mathbf{\$}\mathbf{8}\mathbf{,}\mathbf{727}\end{array}$

$\begin{array}{c}\mathbf{P}\mathbf{r}\mathbf{e}\mathbf{m}\mathbf{i}\mathbf{u}\mathbf{m}\mathbf{o}\mathbf{n}\mathbf{B}\mathbf{o}\mathbf{n}\mathbf{d}\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{r}\mathbf{t}\mathbf{i}\mathbf{z}\mathbf{e}\mathbf{d}\mathbf{=}\mathbf{C}\mathbf{o}\mathbf{u}\mathbf{p}\mathbf{o}\mathbf{n}\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\mathbf{I}\mathbf{s}\mathbf{s}\mathbf{u}\mathbf{e}\mathbf{P}\mathbf{r}\mathbf{i}\mathbf{c}\mathbf{e}\mathbf{\times }\mathbf{I}\mathbf{n}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{e}\mathbf{s}\mathbf{t}\mathbf{R}\mathbf{a}\mathbf{t}\mathbf{e}\mathbf{\times }\mathbf{P}\mathbf{e}\mathbf{r}\mathbf{i}\mathbf{o}\mathbf{d}\\ \mathbf{=}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{150}\mathbf{-}\mathbf{\$}\mathbf{91}\mathbf{,}\mathbf{727}\mathbf{\times }\mathbf{8}\mathbf{\%}\mathbf{\times }\frac{\mathbf{1}}{\mathbf{2}}\\ \mathbf{=}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{150}\mathbf{-}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{670}\\ \mathbf{=}\mathbf{\$}\mathbf{480}\end{array}$

role="math" localid="1657181921662" $\begin{array}{c}\mathbf{InterestExpenses}\mathbf{=}\mathbf{CouponAmount}\mathbf{-}\mathbf{\text{Premium}}\mathbf{onBondAmortized}\\ \mathbf{=}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{150}\mathbf{-}\mathbf{\$}\mathbf{480}\\ \mathbf{=}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{670}\end{array}$

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