Heathrow issues $2,000,000 of 6%, 15-year bonds dated January 1, 2011, that pay

Question

Heathrow issues $2,000,000 of 6%, 15-year bonds dated January 1, 2011, that pay interest semiannually on June 30 and December 31. The bonds are issued at a price of $1,728,224.
Required
1. Prepare the January 1, 2011, journal entry to record the bonds’ issuance.
2. For each semiannual period, compute (a) the cash payment, (b) the straight-line discount amortization, and (c) the bond interest expense.
3. Determine the total bond interest expense to be recognized over the bonds’ life.
4. Prepare the first two years of an amortization table using the straight-line method.
5. Prepare the journal entries to record the first two interest payments.

Explanation / Answer

1. Prepare the January 1, 2011, journal entry to record the bonds’ issuance.
Dr Cash 1,728,224
Dr Discount on Bonds Payable 271,776
Cr Bonds Payable 2,000,000

2. For each semiannual period, compute
(a) the cash payment,
2,000,000 x 3% (twice a year) = 60,000
(b) the straight-line discount amortization,
271,776 / 30 (payment periods) = 9,059 (rounded)
(c) the bond interest expense.
Cash payment + discount
60,000 + 9,059 = 69,059

3. Determine the total bond interest expense to be recognized over the bonds’ life.
Total cash payments + Total discount
1,800,000 + 271,776 = 2,071,776

4. Prepare the first two years of an amortization table using the straight-line method.
I will leave this to you.

5. Prepare the journal entries to record the first two interest payments.
The journal entries will always be the same
Dr Interest Expense 69,059
Cr Discount on Bonds Payable 9,059
Cr Cash 60,000

6. Assume that the bonds are issued at a price of $2,447,990. Repeat parts 1 through 5.
To issue the bonds:
Dr Cash 2,447,990
Cr Premium on Bonds Payable 447,990
Cr Bonds Payable 2,000,000

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