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.
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
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 | $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 |
3.
4.
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.
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