First we calculate effective interest rate of bond.
(Compounded half yearly)
Formula: [Half yearly payment+(Maturity value of bond- Amount
received )/( compounding period *2)]/(Maturity value of bond+Amount
received )/2
= [504000+(8400000-7,115,493)/(10*2)]/(8400000+7,115,493)/2
=(504000+ 64225.35)/7757746.5 = 7.3246% (Close to Effective
interest rate 7.5%)
|
Period |
Payment |
Interest Expense @ 7.5% |
Discount Amortized |
Carrying value |
|
0 |
|
|
|
7115492 |
|
1 |
504000 |
533661.9 |
29661.9 |
7145153.9 |
|
2 |
504000 |
535886.5 |
31886.54 |
7177040.443 |
|
3 |
504000 |
538278 |
34278.03 |
7211318.476 |
|
4 |
504000 |
540848.9 |
36848.89 |
7248167.361 |
|
5 |
504000 |
543612.6 |
39612.55 |
7287779.913 |
|
6 |
504000 |
546583.5 |
42583.49 |
7330363.407 |
|
7 |
504000 |
549777.3 |
45777.26 |
7376140.662 |
|
8 |
504000 |
553210.5 |
49210.55 |
7425351.212 |
|
9 |
504000 |
556901.3 |
52901.34 |
7478252.553 |
|
10 |
504000 |
560868.9 |
56868.94 |
7535121.495 |
|
11 |
504000 |
565134.1 |
61134.11 |
7596255.607 |
|
12 |
504000 |
569719.2 |
65719.17 |
7661974.777 |
|
13 |
504000 |
574648.1 |
70648.11 |
7732622.885 |
|
14 |
504000 |
579946.7 |
75946.72 |
7808569.602 |
|
15 |
504000 |
585642.7 |
81642.72 |
7890212.322 |
|
16 |
504000 |
591765.9 |
87765.92 |
7977978.246 |
|
17 |
504000 |
598348.4 |
94348.37 |
8072326.615 |
|
18 |
504000 |
605424.5 |
101424.5 |
8173751.111 |
|
19 |
504000 |
613031.3 |
109031.3 |
8282782.444 |
|
20 |
504000 |
621208.7 |
117208.7 |
8399991.127 |
1.Interest Expense is calculated on the basis of last year
carrying amount.
2. Discount Amortized= Interest Expense - Payment
Journal entry for first interest payment
Interest Expense A/c Dr $533662
To Discount On Bond payable $29662
To Bank $504000
( Being half yearly interest on bond paid)
