Question

Coyote sold 10,000 shares of $1,000 par value, 6%, 5-year debenture bonds on 1/1/2017. The bonds will pay interests on 12/31 of each year. The market interest rate was 8% as of 1/1/2017. Coyote retired these bonds for $9,580,000 on 1/1/2019.

Instructions: prepare any necessary journal entries for the followings using the effective interest method.

1. The issuance of the bonds.
2. Interest expense accrued in 2017 and 2018.
3. Retirement of the bonds on 1/1/2019.

Answer 1

Required journal entries related to bonds are as prepared below:

Year	Particulars	L.F	Debit ($)	Credit ($)
2017
Jan-01	Cash		9,201,458
	Discount on Bonds Payable		798,542
	Bonds Payable			10,000,000
	(For Bonds issued at discount)
Year	Particulars	L.F	Debit ($)	Credit ($)
2017
Dec-31	Interest Expense		736,117
	Discount on Bonds Payable			136,117
	Cash (10,000,000*6%)			600,000
	(For interest paid for 12 months)
Year	Particulars	L.F	Debit ($)	Credit ($)
2018
Dec-31	Interest Expense		747,006
	Discount on Bonds Payable			147,006
	Cash (10,000,000*6%)			600,000
	(For interest paid for 12 months)
Year	Particulars	L.F	Debit ($)	Credit ($)
2019
Jan-01	Bonds Payable		10,000,000
	Loss on discount of bonds		95,419
	Discount on Bonds Payable			515,419
	Cash			9,580,000
	(For Bonds retired)

Working Notes:

Table value are based on:
n=5
i= 8%
Cash Flow	Table Value	Amount	Present Value
Par (maturity value)	0.6806	10,000,000	6,805,832
Interest (semi-annual)	3.9927	600,000	2,395,626
Issue Price			9,201,458
			PV Factor	Semi-annual year
			0.92593	1
			0.85734	2
			0.79383	3
			0.73503	4
			0.68058	5
			3.99271

	A	B	C	D	E
Date	Cash Interest	Effective Interest	Discount/Premium amortization	Discount	Carrying Value at end of period
	10,000,000*6%	E*8%	B-A		E+C
0				798,542	$9,201,458
1	$600,000	$736,117	$136,117	662,425	$9,337,575
2	$600,000	$747,006	$147,006	515,419	$9,484,581
3	$600,000	$758,766	$158,766	356,653	$9,643,347
4	$600,000	$771,468	$171,468	185,185	$9,814,815
5	$600,000	$785,185	$185,185	0	$10,000,000