Exercise 4-2 On January 1, 2012, Fromer issued $3,000,000 of 12-year, 7 percent

Question

Exercise 4-2

On January 1, 2012, Fromer issued $3,000,000 of 12-year, 7 percent bonds. Interest is paid semi-annually on June 30 and December 31. The issue price was $2,592,000.

1.Prepare the January 1, 2012, journal entry that records the bond issue.

1.      Compute the following for each semi-annual period:

a.   Cash payment.

b.   Straight-line discount amortization.

c.Interest expense.

2.Determine the total interest expense recognized over the life of the bonds.

3.Prepare the first two years of an amortization table (use the straight-line method).

Semiannual

Period-End

Unamortized Discount

Carrying

Value

[Create your amortization table here.]

4.For distinguished performance, prepare journal entries for the first two interest payments.

Semiannual

Period-End

Unamortized Discount

Carrying

Value

Explanation / Answer

Ans. 1 Journal entry for bonds issue: Date Account Titles and explanations Debit credit 1-Jan Cash 2592000 Discount on bonds payable 408000 Bonds Payable 3000000 Ans. 2 a Cash Payment   = Interest expense - Straight line discount amortization 105000 - 17000 = 88000 b Straight-line discount amortization = Bonds payable / 12 * 1/2 408000 / 12 * 1/2 34000 * 1 / 2 17000 c Interest expense =   Issue price * 7% * 1 / 2                                            3000000 * 7% * 1 / 2 3000000 * 0.035 105000 Ans.3 Total Interest expense recognized over life of bonds: Interest expense * 12 * 2 105000 * 24 2520000 *life of bonds is of 12 years and interest is paid semiannually so the interest would be paid 24 times(12 * 2) in 12 years Ans. 4 Semiannual Unamortized Carrying Period-End Discount Value Jan-12 408000 2592000 Jun-12 391000 2609000 Jan-13 374000 2626000 Jun-13 357000 2643000 Jan-14 340000 2660000 Jun-14 323000 2677000 Calculation Date *Unamortized discount : Carrying Value Jan-12 408000 discount on bonds payable 2592000 Cash received Jun-12 (408000 - 17000) (2592000 + 17000) Jan-13 (391000 - 17000) (2609000 + 17000) Jun-13 (374000 - 17000) (2626000 + 17000) Jan-14 (357000 - 17000) (2643000 + 17000) Jun-14 (340000 - 17000) (2660000 + 17000) Ans. 5 Date Account Titles and explanations Debit credit Jun-12 Interest Expense 105000 Discount on Bonds Payable 17000 Cash 88000 Jan-13 Interest Expense 105000 Discount on Bonds Payable 17000 Cash 88000

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