a.
Prepare an amortization schedule
a.

Explanation of Solution
Amortization of bond: The process of allocation and reduction of the discount or Discount on bonds to interest expense over the life of bonds is referred to as amortization of bonds.
Effective interest method: The process of amortization that uses fixed interest rate (effective interest rate) to amortize the Discount or discount on bonds is known to as effective interest method of amortization.
The effective amortization table for first two interest periods, showing the amortization of discount is prepared as follows:
Bonds Payable-Discount Amortization Table
(Effective Interest Method)
Interest Paid | Interest Expense | Periodic Discount Amortized | Balance of Unamortized Discount | Ending Book Value | |
01/01/20XX | $31,156 | $218,844 | |||
30/06/20XX | $10,000 (1) | $10,942 (2) |
$942 (3) | $30,214 |
$219,786 (4) |
12/31/20XX | $10,000 (1) |
$10,989 (5) |
$989 (6) | $29,225 |
$220,775 (7) |
Table (1)
Working Notes:
Calculate interest paid on June 30 (first interest period).
Calculate interest expense on June 30 (first interest period).
Calculate Discount amortized on June 30 (first interest period).
Calculate ending book value on June 30 (first interest period).
Calculate interest expense on December 31 (second interest period).
Calculate Discount amortized on December 31 (second interest period).
Calculate ending book value on December 31 (second interest period).
b.
Journalize the entry for the issuance of bonds on December 31.
b.

Explanation of Solution
Prepare
Date | Accounts Title and Explanations | Debit ($) | Credit ($) | |
December | 31 | Cash (A+)) | 218,844 | |
Discount on Bonds Payable (L–) (8) | 31,156 | |||
Bonds Payable (L+) | 250,000 | |||
(To record issue of bonds at discount) |
Table (2)
- Cash is an asset account and it is increased. Therefore debit cash account by $218,844.
- Discount on Bonds Payable is a contra-liability account and it has a normal debit balance therefore, debit Discount on Bonds Payable account by $31,156.
- Bonds Payable is a liability and it is increased. Therefore credit bonds payable account by $250,000.
Working Notes:
Calculate discount on bonds payable.
c.
Journalize the payment of interest and discount amortization on June 30.
c.

Explanation of Solution
Prepare journal entry:
Date | Accounts Title and Explanations | Debit ($) | Credit ($) | |
June | 30 | Bond Interest Expense (E–) | 10,942 | |
Discount on Bonds Payable (L+) | 942 | |||
Cash (A–) | 10,000 | |||
(To record payment of interest and amortized discount on June 30) |
Table (3)
- Bond Interest Expense is a component of
stockholders’ equity and there is a increase in the interest expense account which decreased the stockholders’ equity. Therefore debit bond interest expense account by $10,942. - Discount on Bonds Payable is a contra-liability account and the amount is increased because the entry is reversed to amortize the discount. Therefore, credit Discount on Bonds Payable account by $942.
- Cash is an asset and it is decreased. Therefore credit cash account by $10,000.
Note: Refer to requirement (a) for the values and calculations.
d.
Journalize the entry to record the payment of interest and discount amortization on December 31.
d.

Explanation of Solution
Prepare journal entry:
Date | Accounts Title and Explanations | Debit ($) | Credit ($) | |
December | 30 | Bond Interest Expense (E–) | 10,989 | |
Discount on Bonds Payable (L+) | 989 | |||
Cash (A–) | 10,000 | |||
(To record payment of interest and amortized discount on June 30) |
Table (4)
- Bond Interest Expense is a component of stockholders’ equity and there is a increase in the interest expense account which decreased the stockholders’ equity. Therefore debit bond interest expense account by $10,989.
- Discount on Bonds Payable is a contra-liability account and the amount is increased because the entry is reversed to amortize the discount. Therefore, credit Discount on Bonds Payable account by $989.
- Cash is an asset and it is decreased. Therefore credit cash account by $10,000.
Note: Refer to requirement (a) for the values and calculations.
Want to see more full solutions like this?
Chapter 10 Solutions
Financial Accounting for Undergr. -Text Only (Instructor's)
- What is its DOL? Accounting questionarrow_forwardThe following data were selected from the records of Fluwars Company for the year ended December 31, current year: Balances at January 1, current year: Accounts receivable (various customers) $ 111,500 Allowance for doubtful accounts 11,200 The company sold merchandise for cash and on open account with credit terms 1/10, n/30, without a right of return. The following transactions occurred during the current year: Sold merchandise for cash, $252,000. Sold merchandise to Abbey Corp; invoice amount, $36,000. Sold merchandise to Brown Company; invoice amount, $47,600. Abbey paid the invoice in (b) within the discount period. Sold merchandise to Cavendish Inc.; invoice amount, $50,000. Collected $113,100 cash from customers for credit sales made during the year, all within the discount periods. Brown paid its account in full within the discount period. Sold merchandise to Decca Corporation; invoice amount, $42,400. Cavendish paid its account in full after the…arrow_forwardI want the correct answer with accountingarrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education





