Question

Legacy issues $325,000 of 5%, four-year bonds dated January 1, 2019, that pay interest semiannually on June 30 and December 31. They are issued at $292,181 when the market rate is 8%.

Required:
a. Determine the total bond interest expense to be recognized over the bonds' life.
b. Prepare the January 1 journal entry to record the bonds’ issuance.
c. Prepare an effective interest amortization table like the one in Exhibit 14B.1 for the bonds’ first two years.
d. Prepare the journal entries to record the first two interest payments.

Answer 1

Answer:

Explanation:

a)

Cash i.e (face value $325,000×5%× 1/2) = $8125

The Table For Total Bond Interest can be computed as follows:

8 payments of $8125 each = 65000

Add: Maturity amount         = 325000

Total repayment:                 = 390000

Less: Amount Borrowed     =  292181

Total Interest expenses      =   97819

b)

The Journal entry for issuance of bonds.

Date               Accounts title  &  explanation            Debit($)     Credit($)

Jan 1, 2019   Cash amount                                       292181

                    Discount on bonds payable                32819

                    Bonds  Payable                                                       325000

c)

The discount on Bonds Payable = Face Value - Issue Price

The discount on Bonds Payable = $325,000 – $292,181 = $32,819

The effective Interest Amortization Table.

Period      Cash      Interest   Discount     Unamortized    Carrying value

                Interest  Expense  Amortized  Discount           of bond

01.01.19                                                       32819                292181

30.06.19  8125       11687.24   3562.24     29256.76         295743.2

31.12.19    8125       11829.73   3704.73     25552.03         299448

30.06.20 8125       11977.92   3852.919   21699.11           303300.9

31.12.20   8125       12132.04   4007.036   17692.08        307307.9

d)

Journal entries to record the first two interest payments

Date           Accounts title  &  explanation        Debit($)     Credit($)

30.06.19      Interest expense                           11687.24

                   Cash  account                                                   8125    

                   Discount on bonds payable                             3562.24

31.12.18       Interest expense                            11829.73

                   Cash account                                                    8125

                  Discount on bonds payable                              3604.73

Answer 2

a) The total bond interest expense that Legacy should recognize over the bonds' life is $97,819 ($65,000 + $32,819)

b) Legacy should use this journal entry to record the bonds' issuance:

Debit Cash $292,181

Debit Bonds Discounts $32,819

Credit Bonds Payable $325,000

• To record the bonds' issuance and discounts.

c. The effective Interest Amortization Table:

Period                      Cash         Interest             Discount        Carrying value

                              Payment     Expense        Amortization            of bond

Jan. 1, 2019                                                                                   $292,181.00

June 30, 2019       $8,125      $11,687.24         $3,562.24        $295,743.24

Dec. 31, 2019        $8,125      $11,829.73          $3,704.73        $299,447.97

June 30, 2020     $8,125      $11,977.92          $3,852.92       $303,300.89

Dec. 31, 2020      $8,125      $12,132.04          $4,007.04       $307,307.93

d. The journal entries to record the first two interest payments are as follows:

June 30, 2019:

Debit Interest Expense $ 11,687.24

Credit Bonds Discount $3,562.24

Credit Cash $8,125

• To record the first interest payment and discount amortization.

December 31, 2019:

Debit Interest Expense $ 11,829.73

Credit Bonds Discount $3,704.73

Credit Cash $8,125

• To record the second interest payment and discount amortization.

Data and Calculations:

Face value of Bonds = $325,000

Proceeds from Bonds = 292,181

Bonds Discount = $32,819 ($320,000 - $292,181)

Coupon rate = 5%

Market rate = 8%

Maturity period = 4 years

Interest payment = semiannual

Interest payment dates = June 30 and December 31

Total interest for 4 years = $65,000 ($325,000 x 5% x 4 years)

Semi-annual interest payment = $8,125 ($325,000 x 5% x 1/2)

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