Question

On January 1, 2018, Splash City issues $500,000 of 9% bonds, due in 20 years, with interest payable semiannually on June 30 and December 31 each year.
Required:

Assuming the market interest rate on the issue date is 10%, the bonds will issue at $457,102.

1. Complete the first three rows of an amortization table.

2. Record the bond issue on January 1, 2018, and the first two semiannual interest payments on June 30, 2018, and December 31, 2018.

Answer 1

Answer:

Date                    Interest      Interest        Amortization       Bond's

                          payment    expense      bond discount     book value

Jan. 1, 2018                                                                            457,102

June 30, 2018    22,500     23,572.45     1,072.45             458,174.45

Dec. 31, 2018      22,500     23,572.45     1,072.45             459,246.90

Assuming you are using a straight line amortization of bond discount, then the amortization per coupon payment = $42,898 / 40 = $1,072.45

January 1, 2018, bonds are issued

Dr Cash 457,102

Dr Discount on bonds payable 42,898

   Cr Bonds payable 500,000

June 30, 2021, first coupon payment

Dr Interest expense 23,572.45

    Cr Cash 22,500

    Cr Discount on bonds payable 1,072.45

December 31, 2021, second coupon payment

Dr Interest expense 23,572.45

    Cr Cash 22,500

    Cr Discount on bonds payable 1,072.45

If the company uses the effective interest method, the numbers vary a little:

amortization of bond discount on first coupon payment:

($457,102 x 5%) - ($500,000 x 4.5%) = $22,855.10 - $22,500 = $355.10

Journal entry to record first coupon payment:

Dr Interest expense 22,855.10

    Cr Cash 22,500

    Cr Discount on bonds payable 355.10

amortization of bond discount on second coupon payment:

($458,174.45 x 5%) - ($400,000 x 4.5%) = $22,908.72 - $22,500 = $408.72

Journal entry to record second coupon payment:

Dr Interest expense 22,908.72

    Cr Cash 22,500

    Cr Discount on bonds payable 408.72