Question

Legacy issues $325,000 of 5%, four-year bonds dated January 1, 2018, that pay interest semiannually on June 30 and December 31. They are issued at $292,181, and their market rate is 8% at the issue date.

Required:

1. Prepare the January 1, 2018, journal entry to record the bonds' issuance.

2. Complete the below table to calculate 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 the journal entries to record the first two interest payments.

Answer 1

Rreq 1.
Journal entry for issuance of bonds
Date	Accounts title and explanation				Debit $	Credit $
01.01.18	Cash account				292181
	Discount on bonds payable				32819
	Bonds payable					325000
Req 2.
Total Bonds Interest:
8 payments of 8125 each				65000
Maturity amount				325000
Total repayment				390000
Less: Amount borrowed				292181
Total Interest expenses				97819
Req 3.
Amort Chart:
Period	Cash Int	Int exp	Discount	Unamortised	Carrying
			Amortized	Discount	value of bond
01.01.18				32819	292181
30.06.18	8125	11687.24	3562.24	29256.76	295743.2
31.12.18	8125	11829.73	3704.73	25552.03	299448
30.06.19	8125	11977.92	3852.919	21699.11	303300.9
31.12.19	8125	12132.04	4007.036	17692.08	307307.9
Req 4.
Journal entries:
Date	Accounts title and explanation				Debit $	Credit $
30.06.18	Interest expense				11687.24
	Cash account					8125
	Discount on bonds payable					3562.24
31.12.18	Interest expense				11829.73
	Cash account					8125
	Discount on bonds payable					3704.73