Answer:
Period Carrying cash outlay Interest Amort E.Carrying
1 554,184 17,100 22,167.36 5,067.36 559,251
2 559,251 17,100 22,370.05 5,270.05 564,521
3 564,521 17,100 22,580.86 5,480.86 570,002
journal entries
cash 554,184 debit
discount on bond payable 15,816 debit
bonds payable 570,000 credit
--to record issuance of the bonds--
interest expense 22,167.36 debit
discount on BP 5067.36 credit
cash 17100 credit
--to record interest payment--
bonds payable 570,000 debit
interest expense 22,580.86 debit
discount on bonds payable 5,480.86 credit
cash 587,100 credit
--to record retirement of the bonds
Explanation:
Under the effective interest method we determinate the interest expense by multiplying the carrying value of the bond by the market rate.
554,184 x 4% = 22,167.36
Then we compare with the actual cash payment:
570 bonds x 1,000 dollars each x 3% = 17,100 dollars
The difference will be the amortization on the bonds discount.
This, will generate a new carrying value so the process is repeated until maturity.
The journal entries will be as follows:
<u>on issuance:</u>
we receive cash, so we debited.
We assume a liability so tis credited and we also create the discount account to adjust the face value of the bond to what we really get for them
<u>on interest payment:</u>
we credit the cash outlay in favor of the bondholders
we debit the interest expense generate for the effective rate method
and we credit the discount by the difference
<u>retirement</u>
we credit the total cash outlay (principal + interest of the period)
we write-off the bonds payable and the bond discount
we reocgnize the last interest expense under debit
