Question

Problem 7 Assume that $200,000 face value of Hoosiers Corp. 8% stated rate bonds are sold on the bond issue date for $183,711. Interest is payable semiannually, and the bonds mature in 15 years. The issue price provides an effective rate of 9% on the bonds. Prepare the entry to record the first interest payment using the straight-line method. Prepare the entry to record the first interest payment using the effective-interest method.

Answer 1

Journal entry to record the first interest payment using the straight-+line method

Accounts Tittles and explanations	Debit ($)	Credit ($)
Interest Expenses A/c	8,543
To Discount on Bond Payable A/c		543
To Cash A/c		8,000
[Journal entry to record the first interest payment using the straight- line method]

Face Value = $200,000

Issue price = $183,711

Discount on Bond Payable A/c = $16,289 [$200,000 - $183,711]

Discount on Bond Payable amortization during each semi-annual period = $543 [$16,589 / 30 Periods]

Journal entry to record the first interest payment using the effective interest method

Accounts Tittles and explanations	Debit ($)	Credit ($)
Interest Expenses A/c	8,267
To Discount on Bond Payable A/c		267
To Cash A/c		8,000
[Journal entry to record the first interest payment using the effective interest method]

Interest Expenses = $8,267 [$183,711 x 9.00% x ½]

Cash paid = $8,000 [$200,000 x 8.00% x ½]

Discount on Bond Payable = $267 [$8,267 - $8,000]