8) Mike Company issued $5,000,000 of 8%, 10-year bonds on January 1, 2014, for $

Question

8) Mike Company issued $5,000,000 of 8%, 10-year bonds on January 1, 2014, for $4,731,582. The market or effective interest rate is 9%. Interest is paid annually on each January 1st, and the effective-interest method of amortization is to be used. a. Provide the journal entry to record issuance of these long-term bonds. (You may or may not need all rows of this textbox) b. Provide the end of the year adjusting journal entry (for Dec. 31, 2014) to record accrued Interest Expense for this bond (using the effective-interest method of amortization) (You may or may not need all rows of this textbox). c. Provide the journal entry required on Jan. 1, 2015, when the interest is paid. (You may or may not need all rows of this textbox). d. Using a "T" account "post" (show) the above entries to the Discount on Bond Payable T-account. What is the account's balance? e. What is the Bond Carrying Value that would appear on Mike's 12/31/14 Balance Sheet?

Explanation / Answer

Solution:

Issue price of the bonds = $4,731,582

Face Value of the bonds = $5,000,000

Issue price is less than face value, it means bonds are issued at discount.

Discount on Bonds Payable = $5000,000 – 4,731,582

Part a --- entry to record issuance of long term bonds

Date

General Journal

Debit

Credit

Jan.1, 2014

Cash (Issue price)

$4,731,582

Discount on Bonds Payable (bal fig)

$268,418

Bonds Payable (Face Value)

$5,000,000

Part b – Year end adjustment entry to record accrued interest expense

Since company is using effective interest rate method to amortize the discount. As per effective interest rate method the interest expenses is calculated as follows:

Interest Expenses for the year = Carrying or Book Value of the Bonds at the beginning of period * Effective Interest Rate

= $4,731,582*9%

= $425,842

Date

General Journal

Debit

Credit

Dec.31, 2014

Interest Expense

$425,842

Discount on Bonds Payable (Bal fig)

$25,842

Interest Payable

(Face Value $5,000,000*Coupon Rate 8%)

$400,000

Part c – Entry to record payment of interest

Date

General Journal

Debit

Credit

jan.1, 2015

Interest Payable

$400,000

   Cash

$400,000

Part d –

Discount on Bonds Payable

Debit

Credit

Jan.1, 2014

$268,418

Dec.31, 2014

$25,842

Ending Bal Dec 31, 2014

$242,576

Part e –

Bond Carrying amount that would appear on 12/31/14 Balance Sheet = Face Value of the bonds – Unamortized or balance of Discount on Bonds Payable

= $5,000,000 - $242,576

= $4,757,424

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Date

General Journal

Debit

Credit

Jan.1, 2014

Cash (Issue price)

$4,731,582

Discount on Bonds Payable (bal fig)

$268,418

Bonds Payable (Face Value)

$5,000,000

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