Chapter 14, Problem 5BPSB

To determine

Issue of bond at discount:

When the coupon rate or contract rate of a bond is lower than the market interest rate, the bond is being issued at discount. The selling price of the bond will be lower than the face value of the bond under issue of bond at discount.

Straight Line Method Amortization of discount:

Under straight line amortization method, a specific amount of discount is amortized each period till its maturity period. The period ending amortization amount is computed by dividing the total discount by the number of periods in maturity of the bonds payable.

To determine:

1. Preparation of journal entry to record the bond’s issuance.

2. Compute the total bond interest expense to be recognized over the life of the bonds.

3. Prepare the first two years of an amortization table using straight-line method.

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

Answer to Problem 5BPSB

Solution:

1.

Date	Accounts	Debit	Credit
2015
Jan. 1	Cash	$198,494
	Discount on Bonds Payable	$41,506
	Bonds Payable		$240,000

2. The total bond interest expense to be recognized over the bond’s life is $97,819.

3.

Period Ending	Unamortized Discount	Carrying Value
01/1/2015	$41,506	$198,494
06/30/2015	$10,122	$199,878
12/31/2015	$38,738	$201,262
06/30/2016	$37,354	$202,646
12/31/2016	$35,970	$204,030

4.

Date	General Journal	Debit	Credit
2015
Jun. 30	Interest Expense	$8,584
	Cash		$7,200
	Discount on Bonds Payable		$1,384
Dec. 31	Interest Expense	$8,584
	Cash		$7,200
	Discount on Bonds Payable		$1,384

Explanation of Solution

Explanation:

1.

Computation of discount on bonds
Par Value of bonds payable	$240,000
Issue price of bonds payable	$198,494
Discount on bonds payable	$41,506

2.

Computation of total interest expense
Amount to be repaid at maturity:
Total Interest Payment	$216,000
Par Value of Bonds	$240,000
Total amount to be repaid	$456,000
Less : Selling Price of the Bonds	$198,494
Total Bond Interest Expense	$257,506

  $\begin{array}{l}*InterestPayment=\$7,200X\text{ 30 }=\$216,000\hfill \\ *SemiannualInterestPayment=\$240,000X0.03=\$7,200\hfill \end{array}$

3.
  $\begin{array}{l}\begin{array}{l}Discountamortizationpersemiannualperiod=\frac{Discountonbondspayable}{Numberofperiodinbonds’life}\\ =\frac{\$41,506}{\text{30 }periods}\end{array}\hfill \\ =\$1,384perperiod\hfill \end{array}$

4.
  $\begin{array}{l}InterestPayment=ParValueofBondsPayableXCouponratepersemiannualperiod\hfill \\ =\$240,000X0.03\hfill \\ =\$7,200\hfill \\ \hfill \\ InterestExpense=InterestPayment+Discountamortizationperperiod\hfill \\ = \$7,200+\$1,384\hfill \\ =\$8,584\hfill \end{array}$

Conclusion

Conclusion:

The total interest expense over the bond’s life of Legacy is $257,506 and every semiannual period a discount of $1,384 is amortized.