Discount Amortization On the first day of the fiscal year, a company issues a $1,300,000, 8%, 9-year bond that pays semiannual interest of $52,000 ($1,300,000x 8% x ), receiving cash of $1,080,702 Journalize the first interest payment and the amortization of the related bond discount. Round to the nearest dollar. If an amount box does not require an entry, leave it blank. Interest Expense 0 Discount on Bonds Payable 0 Cash O 52,000 Feedback Check My Work Bonds Payable is always recorded at face value. Any difference in issue price is reflected in a premium or discount account. The straight-line method of amortization provides equal amounts of amortization over the life of the bond. Learning Objective 2. Amortize Discount by Interest Method On the first day of its fiscal year, Ebert Company issued $27,000,000 of 5-year, 8% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 10%, resulting in Ebert receiving cash of $24,915,049. The company uses the interest method a. Journalize the entries to record the following 1. Sale of the bonds. Round amounts to the nearest dollar. If an amount box does not require an entry, leave it blank Cash Discount on Bonds Payable 4,915,049 2,084,95 Bonds Payable 0 27,000,000 Feedback Check My Work As the discount or premium is amortized, the carrying amount of the bond changes. As a result, interest expense also changes each period 2. First semiannual interest payment, including amortization of discount. Round to the nearest dollar. If an amount box does not require an entry, leave it blank Interest Expense Discount on Bonds Payable Cash 3. Second semiannual interest payment, including amortization of discount. Round to the nearest dollar. If an amount box does not require an entry, leave it blank. Interest Expense Discount on Bonds Payable Cash Feedback Check My Work 3. Cash received (+ discount amortized) x semiannual market rate x time interest expense (debit). Principal x semiannual contract rate x time = cash paid (credit). The discount amortized (credit) is the difference between the two amounts. b. Compute the amount of the bond interest expense for the first year. Round amounts to the nearest dollar. Annual interest paid Discount amortized Interest expense for first year Feedback Check My Work As the discount or premium is amortized, the carrying amount of the bond changes. As a result, interest expense also changes each period. Compare the rate on the bonds and the market rate. Recall that if the market rate of interest is more than the contract rate of interest, the bonds will sell for less than their face amount, because investors are not willing to pay the full face amount for bonds that pay a lower contract rate of interest than the rate they could earn on similar bonds (market rate). Amortize Premium by Interest Method Shunda Corporation wholesales parts to appliance manufacturers. On January 1, Shunda issued $22,000,000 of five-year, 9% bonds at a market (effective) interest rate of 7%, receiving cash of $23,829,684. Interest is payable semiannually. Shunda's fiscal year begins on January 1. The company uses the interest method a. Journalize the entries to record the following 1. Sale of the bonds. Round amounts to the nearest dollar. For a compound transaction, if an amount box does not require an entry, leave it blank Cash 23,829,684V Premium on Bonds Payable 1,829,684 Bonds Payable 0|V | 22,000,000 V Feedback Check My Work Bonds Payable is always recorded at face value. Any difference in issue price is reflected in a premium or discount account 2. First semiannual interest payment, including amortization of premium. Round to the nearest dollar. Fora compound transaction, if an amount box does not require an entry, leave it blank. Interest Expense Premium on Bonds Payable Cash 3. Second semiannual interest payment, including amortization of premium. Round to the nearest dollar. For a compound transaction, if an amount box does not require an entry, leave it blank. Interest Expense Premium on Bonds Payable Cash Feedback Check My Work As the discount or premium is amortized, the carrying amount of the bond changes. As a result, interest expense also changes each period. Compare the rate on the bonds and the market rate. b. Determine the bond interest expense for the first year. Enter amounts as positive numbers. Round amounts to the nearest dollar Annual interest paid Less premium amortized Interest expense for first year
