Chapter 14, Problem 8BPSB

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. If the bond is issued at discount, the selling price of the bond will be lesser than the face value of the bond.

Effective interest method:

Effective interest method aims at computing an accurate interest expense. In case of issue of bonds on discount, the carrying value of the bonds payable excluding the discount amortized is used to determine the interest expense during a particular period. Hence the interest expense increases as the carrying value of the bonds increase.

To determine:

1. Prepare the journal entry to record the bonds’ issuance as on January 1, 2017.

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

3. Prepare an effective interest amortization table for the bonds’ first two years.

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