On January 1, 2014, Lock Corporation issued $1,859,000 face value, 6%, 10- year

Question

On January 1, 2014, Lock Corporation issued $1,859,000 face value, 6%, 10- year bonds at $1,609,519. This price resulted in an effective-interest rate of 8% on the bonds. Lock uses the effective-interest method to amortize bond premium or discount. The bonds pay annual interest January 1. Prepare the journal entry to record the issuance of the bonds on January 1, 2014. (Round answers to 0 decimal places, e.g. 125. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Prepare an amortization table through December 31, 2016 (three interest periods) for this bond issue. (Round answers to 0 decimal places, e.g. 125.) Prepare the journal entry to record the accrual of interest and the amortization of the discount on December 31, 2014. (Round answers to 0 decimal places, e.g. 125. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Prepare the journal entry to record the payment of interest on January 1, 2015. (Round answers to 0 decimal places, e.g. 125. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Prepare the journal entry to record the accrual of interest and the amortization of the discount on December 31, 2015. (Round answers to 0 decimal places, e.g. 125. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Explanation / Answer

Solution:

Journal entry to record the issuance of bonds on January 1, 2014:

Amortization table through December 31, 2016:

Journal entry to record the accrual interest and the amortization of the discount on December 31, 2014:

Journal entry to record the payment of interest on January 1, 2015:

Journal entry to record the accrual interest and the amortization of the discount on December 31, 2015:

Working Note:

December 31, 2014:

Interest Payable = 1,859,000 * 6% = 111,540

Interest Expense = 1,609,519 * 8% = 128,762

December 31, 2015:

Interest Payable = 1,859,000 * 6% = 111,540

Interest Expense = (1,609,519 + 17,222) * 8% = 130,139

Cash    1,609,519 Discount on Bonds Payable       249,481 Bonds Payable    1,859,000

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