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Problem 14-5A Straight-Line: Amortization of bond premium and discount LO P1, P2, P3 [The following information applies to...

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Accounting

Problem 14-5A Straight-Line: Amortization of bond premium anddiscount LO P1, P2, P3

[The followinginformation applies to the questions displayedbelow.]

Legacy issues $710,000of 8.0%, four-year bonds dated January 1, 2017, that pay interestsemiannually on June 30 and December 31. They are issued at$621,812 and their market rate is 12% at the issue date.

1. Prepare the January 1, 2017, journal entryto record the bonds' issuance.

2. Determine the total bond interest expense tobe recognized over the bonds' life.

3. Prepare a straight-line amortization tablefor the bonds' first two years.

4. Prepare the journal entries to record thefirst two interest payments

Answer & Explanation Solved by verified expert
4.5 Ratings (863 Votes)

Journal entry for issuance:
Date Accounts title and explanations Debit $ Credit $
01.01.17 Cash account 621812
Discount on Bonds payable 88188
      Bonds Payable 710000
Total Interest:
8 payments of 28,400 each 227200
Maturity amount to be paid 710000
Total repayment 937200
Less: Amount borrowed 621812
Total Interest: 315388
Total Discount on Bonds payable: 88188
Divide: Number of periods 8
Discount amortized each period 11023.5
Amort Chart:
Period Cash Interest Discount Unamortized Carrying
Amortized Discount value
01.01.17 88188 621812
30.06.17 28400 11023.5 77164.5 632835.5
31.12.17 28400 11023.5 66141 643859
30.06.18 28400 11023.5 55117.5 654882.5
31.12.18 28400 11023.5 44094 665906
Journal entries
Date Accounts title and explanations Debit $ Credit $
30.06.17 Interest expenses 39423.5
     Cash account 28400
     Discount on Bonds payable 11023.5
31.12.17 Interest expenses 39423.5
     Cash account 28400
     Discount on Bonds payable 11023.5

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