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. The selling price of the bond will be lower than the face value of the bond under issue of bond at discount.

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 inclusive of 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 increases.

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 effective interest method.

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