On January 1, 2016, for $17.9 million, Marker Company issued 8% bonds, dated Jan
ID: 2479343 • Letter: O
Question
On January 1, 2016, for $17.9 million, Marker Company issued 8% bonds, dated January 1, 2016, with a face amount of $19.9 million. For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)
Prepare the journal entry to record interest on June 30, 2016, using the effective interest method.
Prepare the journal entry to record interest on December 31, 2016, using the effective interest method.
On January 1, 2016, for $17.9 million, Marker Company issued 8% bonds, dated January 1, 2016, with a face amount of $19.9 million. For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)
Explanation / Answer
Solution:
Par Value of the bonds = $19,900,000
Semi Annual Coupon Interest = $19,900,000 x 8% x ½ = $796,000
Issue Price of the bonds = $17,900,000
Since Issue price is less than Par Value, Bonds are issued at discount.
Discount on Bonds Payable = $19,900,000 - $17,900,000 = $2,000,000
The discount on bonds payable is to be amortized over the life of the bond by using effective interest method.
Effective Interest Rate (market yield) = 10% per annum or 5% semi annually
Bond Discount Amortization Schedule for the first 2 interest periods
Date
Interest Payable
Interest Expenses (Book Value of bonds at the beginning of year @ 5% semiannual effective interest rate)
Amortization of Discount on Bonds Payable (Interest Expenses - Interest Payable)
Discount on Bonds Payable Ending Balance
Par Value of Bonds
Book Value of the bonds at the end of year
Jan 1, 2016
$0
$0
$2,000,000
$19,900,000
$17,900,000
June 30,2016
$796,000
$895,000
$99,000
$1,901,000
$19,900,000
$17,999,000
Dec 31,2016
$796,000
$899,950
$103,950
$1,797,050
$19,900,000
$18,102,950
Journal Entries to record interest on June 30, 2016, using effective interest method.
Date
Account Title
Debit
Credit
June 30, 2016
Interest Expenses Dr.
$895,000
To Discount on Bonds Payable
$99,000
To Interest Payable to Bond Holders
$796,000
(Being interest expenses are recorded)
Journal Entries to record interest on December 31, 2016, using effective interest method.
Dec 31, 2016
Interest Expenses Dr.
$899,950
To Discount on Bonds Payable
$103,950
To Interest Payable to Bond Holders
$796,000
(Being interest expenses are recorded)
Bond Discount Amortization Schedule for the first 2 interest periods
Date
Interest Payable
Interest Expenses (Book Value of bonds at the beginning of year @ 5% semiannual effective interest rate)
Amortization of Discount on Bonds Payable (Interest Expenses - Interest Payable)
Discount on Bonds Payable Ending Balance
Par Value of Bonds
Book Value of the bonds at the end of year
Jan 1, 2016
$0
$0
$2,000,000
$19,900,000
$17,900,000
June 30,2016
$796,000
$895,000
$99,000
$1,901,000
$19,900,000
$17,999,000
Dec 31,2016
$796,000
$899,950
$103,950
$1,797,050
$19,900,000
$18,102,950