The long-term debt section of Karidis Corporation\'s balance sheet at the end of
ID: 2423431 • Letter: T
Question
The long-term debt section of Karidis Corporation's balance sheet at the end of its fiscal year, December 31, 2013, follows.
$460,000
Using the effective interest method, prepare entries in journal form relevant to the interest payments on July 1, 2014, December 31, 2014, and January 1, 2015. Assume a market interest rate of 10 percent. For a compound transaction, if an amount box does not require an entry, leave it blank.
Long-term liabilities Bonds payable—8%, interest payable 1/1 and 7/1, due 12/31/16 $500,000 Less unamortized bond discount 40,000$460,000
Explanation / Answer
When a bond is sold at discount, the amount of bond discount must be amortized to interest expense over the life of the bond. Since the debit amount in the account Discount on Bonds Payable will be moved to the account Interest Expense, the amortization will cause each period's interest expense to be greater than the amount of interest paid during each of the years that the bond is outstanding.
Date Interest payment Interest expense Amortisation of discount Debit balance in the bond discount account Credit balance in bonds payable Book value Bond rate Market rate 31-Dec-13 $ 40,000 $ 500,000 $ 460,000 1-Jul-14 $ 20,000 $ 23,000 $ 3,000 $ 37,000 $ 500,000 $ 463,000 31-Dec-14 $ 20,000 $ 23,150 $ 3,150 $ 33,850 $ 500,000 $ 466,150 1-Jul-15 $ 20,000 $ 23,308 $ 3,308 $ 30,543 $ 500,000 $ 469,458 31-Dec-15 $ 20,000 $ 23,473 $ 3,473 $ 27,070 $ 500,000 $ 472,930 1-Jul-16 $ 20,000 $ 23,647 $ 3,647 $ 23,423 $ 500,000 $ 476,577 31-Dec-16 $ 20,000 $ 23,829 $ 3,829 $ 19,594 $ 500,000 $ 480,406 The bond should continue for future years so that credit balance payable should be equal to book value. 1-Jul-14 Interest expense Debit $ 23,000 To discount of bonds Credit $ 3,000 To Cash Credit $ 20,000 31-Dec-14 Interest expense Debit $ 23,150 To discount of bonds Credit $ 3,150 To Cash Credit $ 20,000 1-Jul-15 Interest expense Debit $ 23,308 To discount of bonds Credit $ 3,308 To Cash Credit $ 20,000Related Questions
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