a)
Prepare the
1. The bonds were issued at 98. (Round to nearest dollar.)
2. The bonds were issued at 104. (Round to nearest dollar.)
a)

Explanation of Solution
Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.
Bond discount: Bond discount is the amount by which the selling price (or issue price or market price) of the bond is lower than the face
Bond premium: Bond discount is the amount by which the selling price (or issue price or market price) of the bond is more than the face value of the bond.
Prepare the Adjusting entries at December 31, 2018, and the journal entry to record the payment of bond interest on March 1, 2019:
1. The bonds were issued at 98. (Round to nearest dollar.)
Date | Account title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
December 31, 2018 | Bond Interest Expense (1) | 203,333 | ||
Discount on Bonds Payable | 3,333 | |||
Bond Interest Payable | 200,000 | |||
(To record the adjusting entry for the year end December 31, 2018) | ||||
March 1, 2019 | Bond Interest Payable | 200,000 | ||
Bond Interest expense | 101,667 | |||
Discount on Bonds payable (2) | 1,667 | |||
Cash | 300,000 | |||
(To record semiannual bond interest payment and interest expense for two months) |
Table (1)
December 31, 2018:
- Bond interest expense (decreases the equity) is increased. Thus, it is debited.
- Discount on bonds payable (contra liability account) is decreased. Thus, it is credited.
- Bond interest payable (liability) is increased. Thus, it is credited.
March 1, 2019:
- Bond interest payable (liability) is decreased. Thus, it is debited.
- Bond interest expense (decreases the equity) is increased. Thus, it is debited.
- Discount on bonds payable (contra liability account) is decreased. Thus, it is credited.
- Cash (asset) is decreased. Thus, it is credited.
Working note:
Calculate the bond interest payable as on December 31, 2018:
Bond Interest | $200,000 |
Add: Discount amortization | 3,333 |
Bond interest expense as on December 31, 2018 | $203,333 |
(1)
Table (2)
Calculate the discount amortization for 2 months (January, February):
2. The bonds were issued at 104. (Round to nearest dollar.)
Date | Account title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
December 31, 2018 | Bond Interest Expense (3) | 193,333 | ||
Premium on Bonds Payable | 6,667 | |||
Bond Interest Payable | 200,000 | |||
(To record the adjusting entry for the year end December 31, 2018) | ||||
March 1, 2019 | Bond Interest Payable | 200,000 | ||
Bond Interest expense | 96,667 | |||
Premium on Bonds payable (4) | 3,333 | |||
Cash | 300,000 | |||
(To record semiannual bond interest payment and interest expense for two months) |
Table (3)
December 31, 2018:
- Bond interest expense (decreases the equity) is increased. Thus, it is debited.
- Premium on bonds payable (liability) is decreased. Thus, it is debited.
- Bond interest payable (liability) is increased. Thus, it is credited.
March 1, 2019:
- Bond interest payable (liability) is decreased. Thus, it is debited.
- Bond interest expense (decreases the equity) is increased. Thus, it is debited.
- Premium on bonds payable (liability) is decreased. Thus, it is debited.
- Cash (asset) is decreased. Thus, it is credited.
Working note:
Calculate the bond interest payable as on December 31, 2018:
Bond Interest | $200,000 |
Less: Premium amortization | 6,667 |
Bond interest expense as on December 31, 2018 | $193,333 |
(3)
Table (4)
Calculate the premium amortization for 2 months (January, February):
b)
Compute the net bond liability at December 31, 2019, under assumptions 1 and 2.
b)

Explanation of Solution
Compute the net bond liability at December 31, 2019, under assumptions 1 and 2:
Bonds issued at $98 | Bonds issued at $104 | |
Bond payable | $5,000,000 | $5,000,000 |
Less: Discount on bonds payable (5) | (86,667) | |
Add: Premium on bonds payable (6) | 173,333 | |
Net bond liability | $4,913,333 | $5,173,333 |
Table (5)
Therefore, the net bond liability $98 is $4,913,333 and at $104 is $5,173,333.
Working notes:
Calculate the discount amortized on bonds payable as on December 31, 2019:
Total discount on bonds payable | $100,000 |
Amount amortized in 2018 | 3,333 |
Amount amortized in 2019 | 10,000 |
Discount amortized as on December 31, 2018 (B) | $13,333 |
(5)
Table (6)
Calculate the premium amortized on bonds payable as on December 31, 2019
Total discount on bonds payable | $200,000 |
Premium amortized in 2018 | 6,667 |
Premium amortized in 2019 | 20,000 |
Discount amortized as on December 31, 2018 (B) | $26,667 |
(6)
Table (7)
c)
Find the assumption in part a, in which the investor’s effective rate of interest is higher, explain the same.
c)

Explanation of Solution
Under the assumption 1 of part a, the effective rate of interest would be higher because the investors will pay less for bonds with a given rate of interest, the higher the effective interest rate the investors’ will earn.
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