Question

Required information Problem 10-5A Straight-Line: Amortization of bond premium and discount LO P1, P2, P3 The following information applies to the questions displayed below] Legacy issues $70o,000 of 7.5% four-year bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. They are issued at $643,419 and their mearket rate is 10 % at the issue date Problem 10-5A Part 1 Required: 1. Prepare the January 1, 2017, journal entry to record the bonds' issuance. View transaction list Journal entry worksheet < Record the issue of bonds with a par value of $700,000 cash on January 1, 2017 at an issue price of $643,419

Answer 1

Face Value = $700,000
Proceed from Issuance = $643,419

Discount on Bonds Payable = Face Value - Proceed from Issuance
Discount on Bonds Payable = $700,000 - $643,419
Discount on Bonds Payable = $56,581

Annual Coupon Rate = 7.50%
Semiannual Coupon Rate = 3.75%
Semiannual Coupon = $700,000 * 3.75%
Semiannual Coupon = $26,250

Semiannual Periods = 8 (4 years)

Semiannual Amortization of Discount = Discount on Bonds Payable / Semiannual Periods
Semiannual Amortization of Discount = $56,581 / 8
Semiannual Amortization of Discount = $7,073

Semiannual Interest Expense = Semiannual Coupon + Semiannual Amortization of Discount
Semiannual Interest Expense = $26,250 + $7,073
Semiannual Interest Expense = $33,323

Answer 1.

Credit Date Jan. 01, 2017 General Journal Cash Discount on Bonds Payable Bonds Payable Debit 643,419 56,581 700,000

Answer 2.

Total bond interest expense over life of bonds: Amount repaid: 8 payments of 26250 Par value at maturity Total repaid Less: amount borrowed Total bond interest expense 210000 700000 910000 643419 266581

Answer 3.

Carrying Value Semiannual Period End 01/01/2017 06/30/2017 12/31/2017 06/30/2018 12/31/2018 Unamortized Discount 56581 49508 42435 35362 28289 643419 650492 657565 664638 671 711

Answer 4.

Credit Date June 30, 2017 Debit 33,323 General Journal Interest Expense Discount on Bonds Payable Cash Interest Expense Discount on Bonds Payable Cash 7,073 26,250 Dec 31, 2017 33,323 7,073 26,250