Question
Bond Discount, Entries for Bonds Payable Transactions, Interest Method of Amortizing Bond Discount On July 1, 20Y1, Livingston Corporation, a wholesaler of manufacturing equipment, issued
Bond Discount, Entries for Bonds Payable Transactions, Interest Method of Amortizing Bond Discount
On July 1, 20Y1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $35,000,000 of 20-year, 11% bonds at a market (effective) interest rate of 14%, receiving cash of $28,002,100. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.
1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds.
20Y1 July 1 | Accounts PayableBonds PayableCashInterest ExpenseInterest PayablePremium on Bonds PayableCash | Cash | Cash |
Accounts PayableBonds PayableDiscount on Bonds PayableInterest ExpenseInterest PayablePremium on Bonds PayableDiscount on Bonds Payable | Discount on Bonds Payable | Discount on Bonds Payable | |
Bonds PayableCashDiscount on Bonds PayableInterest ExpenseInterest PayablePremium on Bonds PayableBonds Payable | Bonds Payable | Bonds Payable |
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Bonds Payable is always recorded at face value. Any difference in issue price is reflected in a premium or discount account.
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2. Journalize the entries to record the following:
a. The first semiannual interest payment on December 31, 20Y1, and the amortization of the bond discount, using the interest method. Round to the nearest dollar.
20Y1 Dec. 31 | Bonds PayableCashDiscount on Bonds PayableInterest ExpenseInterest PayablePremium on Bonds PayableInterest Expense | Interest Expense | Interest Expense |
Accounts PayableBonds PayableDiscount on Bonds PayableInterest ExpenseInterest PayablePremium on Bonds PayableDiscount on Bonds Payable | Discount on Bonds Payable | Discount on Bonds Payable | |
Acounts PayableBonds PayableCashInterest ExpenseInterest PayablePremium on Bonds PayableCash | Cash | Cash |
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2a. Cash received on July 1, 20Y1 x semiannual market rate = Interest Expense (debit). Principal x semiannual contract rate = cash paid (credit). The premium amortized (debit) is the difference between the two amounts.
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b. The interest payment on June 30, 20Y2, and the amortization of the bond discount, using the interest method. Round to the nearest dollar.
20Y2 June 30 | Bonds PayableCashDiscount on Bonds PayableInterest ExpenseInterest PayablePremium on Bonds PayableInterest Expense | Interest Expense | Interest Expense |
Accounts PayableBonds PayableDiscount on Bonds PayableInterest ExpenseInterest PayablePremium on Bonds PayableDiscount on Bonds Payable | Discount on Bonds Payable | Discount on Bonds Payable | |
Accounts PayableBonds PayableCashInterest ExpenseInterest PayablePremium on Bonds PayableCash | Cash | Cash |
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2b. Cash received (- premium amortized Dec. 31, 20Y1) x semiannual market rate = Interest Expense (debit). Principal x semiannual contract rate = cash paid (credit). The premium amortized (debit) is the difference between the two amounts.
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3. Determine the total interest expense for 20Y1. Round to the nearest dollar. $fill in the blank d70c11fd2013f98_1
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