Question

8) Ally Company issued $4,000,000 of 7%, 12-year bonds on January 1, 2018, for $3,731,582. The market or effective interest rate is 9%. Interest is paid annually on each January 1st, and the effective-interest method of amortization is to be used. a. Provide the journal entry to record issuance of these long-term bonds. (You may or may not need all rows of this textbox b. Provide the end of the year adjusting journal entry (for Dec. 31, 2018) to record accrued Interest Expense for this bond (using the effective-interest method of amortization). (You may or may not need all rows of this textbox c. Provide the journal entry required on Jan. 1, 2019, when the interest is paid. (You may or may not need all rows of this textbox) d. Using a "T" account "post" (show) the above entries to the Discount on Bond Pavable T-account. What is the account's balance? e. What is the Bond Carrying Value that would appear on Ally's 12/31/18 Balance Sheet?

Answer 1

Journal entries to be booked will be:

a) Debit....Cash...3731582

Debit...Discount on Bonds Payable.....268418 (4000000-3731582)

Credit....Bonds Payable.......4000000 (Par Value)

b) Debit.....Interest Expense..... 335842 (Carrying value * Market Rate = 3731582*9%)

Credit...Discount on Bonds Payable........ 55842 (balancing figure of 335842-280000)

Credit.......Interest Payable 280,000 (Par value * Interest Rate = 4000000*7%)

c) Debit......Interest Payable............280000

Credit.......Cash 280,000 (4000000*7%)

d) T account will be prepared as follows

Date	Debit		Date	Credit
Jan 1	268418		Dec 31	55842
End Bal at Dec 31, 2018	212576

e) Bond Carrying Value =

Face Value = 4000000

Add: Unamortized Discount = (268418-55842)

Carrying Value = $3787424