On January 1, 2016, the Diamond Association issued bonds with a face value of $2
ID: 2564657 • Letter: O
Question
On January 1, 2016, the Diamond Association issued bonds with a face value of $207,000, a stated rate of interest of 6 percent, and a 10-year term to maturity. Interest is payable in cash on December 31 of each year. The effective rate of interest was 8 percent at the time the bonds were issued. The bonds sold for $179,220. Diamond used the effective interest rate method to amortize the bond discount.
Determine the amount of the discount on the day of issue.
Determine the amount of interest expense recognized on December 31, 2016.
Determine the carrying value of the bond liability on December 31, 2016
Provide the general journal entry necessary to record the December 31, 2016, interest expense.
a.Determine the amount of the discount on the day of issue.
Explanation / Answer
1. Discount on thd day of issue = 207000-179220 = 27780
2 Amount of interest expenses recognized = (179220*8%) = 14337.60
3 Carrying value on december 31 2016 = 207000-(27780-1918) = 181138
4) Journal entry on december 31,2016
date accounts & explanation debit credit 2016 Dec 31 Interest expenses a/c 14338 Discount on bonds payable 1918 Interest payable (207000*6%) 12420 (To record interest)