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

Answer 8-a Answer 8-d Journal entry to record issuance of long term bonds Discount on bonds Payable Journal   Debit Credit Date Account Titles Debit Credit Jan.1,2014 Bond Payable $268,418 Dec.31,2014 Interest Expense $25,842 Jan.1,2014 Cash $4,731,582 Discount on Bonds Payable $268,418 Dec.31,2014 Balance c/f $242,576 Bonds Payable $5,000,000 $268,418 $268,418 Jan.1,2015 Balance b/d $242,576 Answer 8-b Journal entry to record end of year adjustment to record accrued interest expense Balance in Discount on bond payable as on Dec.31,2014 = $2,42,576 Journal   Date Account Titles Debit Credit Answer 8-e Dec.31,2014 Interest Expense $425,842 Bond Carrying value that would appear on Mike's 31.12.2014 Balance sheet Discount on Bonds Payable $25,842 Bond Book value $5,000,000 Interest Payable $400,000 Less : Discount on bond paayble $242,576 Bond Carrying Value as on 31.12.14 $4,757,424 Answer 8-c Journal entry to record payment of interest Journal   Date Account Titles Debit Credit Jan.1,2015 Interest Payable $400,000 Cash $400,000

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