V. Consider the following example. Bonds with a term of 5 years and face value o
ID: 2339039 • Letter: V
Question
V. Consider the following example. Bonds with a term of 5 years and face value of $1,000,000 are issued on January 1, 2017 for the amount of $900,000. The contract rate of interest is 10%. Market rate of interest is 12%. Interest is paid annually on December 31. 1) Calculate the amount of interest paid in 2017. Show details of your calculations 2) Write out the journal entry for the issuance of bonds on January 1 3) Write out the journal entry to record Interest Expense on December 31. Discount or premium as applicable is amortized over a straight- line basis.Explanation / Answer
Interest payable in 2017
(A)
Face value of Bond
$ 1,000,000.00
(B)
Rate of Interest
10%
(A*B)
Interest Expense
$ 100,000.00
Requirement 1
Amount of Interest paid in 2017 = $100,000.
Requirement 2
Journal entry for Issue of Bond
Date
General Journal
Debit
Credit
1-Jan 2017
Cash
$ 900,000.00
Discount on Bond payable
$ 100,000.00
Bonds Payable
$ 1,000,000.00
(Bond issued)
Requirement 3
Discount on Bond payable = $100000
Amortizable value per year =$100,000/5 =$20,000.
Journal entry to record Interest expense will be as follows
Date
General Journal
Debit
Credit
31-Dec 2017
Interest Expense
$ 120,000.00
Discount on Bond payable
$ 20,000.00
Cash
$ 100,000.00
(Bond issued)
Requirement 2
Journal entry for Issue of Bond
Date
Debit account name
$ Amount
Debit account name
$ Amount
Credit account name
$ Amount
1-Jan
Cash
$ 900,000.00
Discount on Bond payable
$ 100,000.00
Bonds payable
$ 1,000,000.00
Two accounts are debited and one account is Credited in the above entry.
Journal entry Interest payment
Date
Debit account name
$ Amount
Credit account name
$ Amount
Credit account name
$ Amount
31-Dec
Interest Expense
$120,000.00
Discount on Bond payable
$ 20,000.00
Cash
$100,000.00
Two accounts are credited and one account is debited in the above entry.
(A)
Face value of Bond
$ 1,000,000.00
(B)
Rate of Interest
10%
(A*B)
Interest Expense
$ 100,000.00
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