Bond discount , entries for bonds payable transactions, interest method of amort
ID: 2387018 • Letter: B
Question
Bond discount, entries for bonds payable transactions, interest method of amortizing bond discount
On July 1, 2010, Linux Corporation, a wholesaler of electronics equipment, issued $45,000,000 of 10-year, 10% bonds at an effective interest rate of 14%, receiving cash of $35,465,423. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.
Instructions
1. Journalize the entry to record the amount of cash proceeds from the sale of the bonds.
2. Journalize the entries to record the following:
a. The first semiannual interest payment on December 31, 2010, and the amortization of the bond discount, using the effective interest rate method. (Round to the nearest dollar.)
b. The interest payment on June 30, 2011, and the amortization of the bond discount, using the effective interest rate method. (Round to the nearest dollar.)
3. Determine the total interest expense for 2010.
Explanation / Answer
1. Journalize the entry to record the amount of cash proceeds from the sale of the bonds. Dr Cash $35,465,423 Dr Discount on bonds payable $9,534,577 (to be amortised over 20 interest periods) Cr Bonds payable $45,000,000 (always at face value) 2. Journalize the entries to record the following: a. The first semiannual interest payment on December 31, 2010, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.) Dr Interest expense $2,726,729 Cr Cash $2,250,000 ($45m x 10% x 6/12) Cr Discount on bonds payable $476,729 b. The interest payment on June 30, 2011, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.) Since you're using the straight-line method, the entries are the same: Dr Interest expense $2,726,729 Cr Cash $2,250,000 ($45m x 10% x 6/12) Cr Discount on bonds payable $476,729 3. Determine the total interest expense for 2010. $2,726,729 (as above)