Chapter 14, Problem 1PSA

To determine

Bonds Issuance:

The Bonds issuance by the company is a source of long term financing and is issued at a discount or premium depending the prevailing market rate of interest and stated rate of interest on bonds. When the stated rate of interest is lower than the market rate of interest, then the investors will be ready to invest only in the situation when the bonds are issued at discount. This discount on bonds issue shall be treated as expenses of the issuing company and need to be amortized over a period of bonds.

Requirement:

The Journal entry for the issuance of bonds.

To determine

Straight line Amortization of discount:

The Straight line amortization of discount is a technique of writing off the total discount over a period of bonds with an equal amount on each interest period. This equal amount can be computed by dividing the total amount of discount by the number of interest periods over a life of bonds.

The cash interest, straight line amortized discount and Interest expense for each interest period to be computed.

To determine

Total interest expense over the life of bonds:

The total interest expense over the life off bonds can be computed by the adding up the all the amount paid over the lifetime of the bonds i.e. cash interest payment and maturity value of bonds and then the amount borrowed at the time of issuance of bonds shall be deducted from the above computed amount to arrive at the amount of total interest expense over the life of the bonds.

The Total interest expenses over the life of the bonds.

To determine

Amortization table:

The amortization table under straight line method reflects the discount amortized at each interest period, cash interest paid, total interest expense of each period, unamortized discount left at the end of period and carrying value of bonds in the books.

The Amortization table shall be prepared.

To determine

Accounting treatment of interest payment and amortized discount:

The Accounting entry required to be passed at each interest period is debiting the total interest expense as per amortization chart and credit being made to the cash account for cash interest paid and Discount on bonds payable for the amount of discount amortized.

The Journal entries for two interest payments.