On January 1, 20X1, PAR purchases $100,000 par value, 12 percent coupon rate (i.e., stated rate), 10-year bonds from ROM for $90,000. Interest on the bonds is payable on January 1 and July 1. The interest expense recognized by ROM and the interest income recognized by PAR each year include straight-line amortization of the discount. (For simplicity, we do not use the effective interest method. But the logic is the same.) Here is how to calculate interest expense or income for bonds issued at discount or premium with straight-line amortization. For each payment period, interest expense and amortization of discount or premium: Cash interest ($100,000 ×12% ÷ 2) $6,000 Amortization of discount ($10,000 ÷ 20 semiannual interest periods) 500 (should this be added to or subtracted from cash interest? If you don't know the answer, review intermediate account II) Interest expense or income for the semiannual period $6,500 1) For ROM, record entries related to bonds for 1/1/20X1.
On January 1, 20X1, PAR purchases $100,000 par value, 12 percent coupon rate (i.e., stated rate), 10-year bonds from ROM for $90,000. Interest on the bonds is payable on January 1 and July 1. The interest expense recognized by ROM and the interest income recognized by PAR each year include straight-line amortization of the discount. (For simplicity, we do not use the effective interest method. But the logic is the same.)
Here is how to calculate interest expense or income for bonds issued at discount or premium with straight-line amortization.
For each payment period, interest expense and amortization of discount or premium:
Cash interest ($100,000 ×12% ÷ 2) $6,000
Amortization of discount
($10,000 ÷ 20 semiannual interest periods) 500 (should this be added to or subtracted from cash interest? If you don't know the answer, review intermediate account II)
Interest expense or income for the semiannual period $6,500
1) For ROM, record entries related to bonds for 1/1/20X1.
A. Dr. Cash 90,000
Dr. Premium on Bonds Payable 10,000
Cr. Bonds Payable 100,000
B. Dr. Cash 90,000
Cr. Bonds Payable 90,000
C. Dr. Cash 90,000
Dr. Discount on Bonds Payable 10,000
Cr. Bonds Payable 100,000
D. Dr. Cash 100,000
Cr. Bonds Payable 100,000
2) For ROM, record entries related to bonds for 7/1/20X1.
A. Dr. Interest Expense 6,500
Cr. Discount on Bonds Payable 500
Cr. Cash 6,000
B. Dr. Interest Expense 6,500
Cr. Premium on Bonds Payable 500
Cr. Cash 6,000
C. Dr. Interest Expense 6,500
Cr. Cash 6,500
D. Dr. Interest Expense 6,000
Cr. Cash 6,000
3) For PAR, record entries related to bonds for 1/1/20X1.
A. Dr. Bonds payable 100,000
Cr. Cash 100,000
B. Dr. Investment in ROM Bonds 90,000
Cr. Cash 90,000
C. Dr. Bonds payable 90,000
Cr. Cash 90,000
D. Dr. Bonds payable 100,000
Cr. Discount on bonds 10,000
Cr. Cash 90,000
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