Legacy issues $325,000 of 5%, four year bonds dated January 1st, 2013, that pay interest...

Question:

Legacy issues $325,000 of 5%, four-year bonds dated January 1st, 2013, that pay interest semiannually on June 30th and Dec 31st. They are issued at $292,181 and their market rate is 8% at the issue date.

1. Prepare the January 1st, 2013 journal entry to record the bonds issuance

2. Determine the total bond interest expense to be recognized over the bonds life

3. Prepare an? effective interest amortization table for the bonds first two years

4. Prepare the journal entries to record the first two interest payments

Bonds:

Bonds are issued by companies in order to generate capital. These long-term debt instruments have a maturity value that? must be repaid upon the bond's due date as well as an interest rate which determines the interest to be paid to investors in exchange for their capital. Bonds may be issued at their face values, at a premium, or at a discount.

Answer and Explanation:

1. Prepare the January 1st, 2013 journal entry to record the bonds issuance

Date Account Debit Credit Explanation
Jan. 1, 2013 Cash $292,181 Record inflow of cash from issuance
Discount on Bonds Payable $32,819 Record discount on bonds ($325,000 - $292,181)
Bonds Payable $325,000 Record bonds at face value

2. Determine the total bond interest expense to be recognized over the bonds life

Cash Paid
($325,000 x 5% x 4)
Discount on Bonds Interest Expense
$65,000 + $32,819 = $97,819

3. Prepare an? effective interest amortization table for the bonds first two years

A B C D E F G
Date Interest   Payment Interest   Expense Amortization   of Bond Discount Bond   Discount Account Balance Bonds Payable Account Balance Book   Value of the Bonds
(Stated 2.5% x Face) (Market 4% x   Previous BV in G) (C - B) (Previous E -   D) (F + E)
January 1, 2013 32,819.00 325,000.00 292,181.00
June 30, 2013 8,125.00 11,687.24 3,562.24 29,256.76 325,000.00 295,743.24
December 31, 2013 8,125.00 11,829.73 3,704.73 25,552.03 325,000.00 299,447.97
June 30, 2014 8,125.00 11,977.92 3,852.92 21,699.11 325,000.00 303,300.89
December 31, 2014 8,125.00 12,132.04 4,007.04 17,692.08 325,000.00 307,307.92

4. Prepare the journal entries to record the first two interest payments

Date Account Debit Credit Explanation
June 30, 2013 Interest Expense $11,687.24 Record interest expense ($292,181 x 4%)
Discount on Bonds Payable $3,562.24 Amortize discount ($11,687.24 - $8,125)
Cash $8,125 Record outflow of cash made in payment of interest ($325,000 x 2.5%)
Dec 31, 2013 Interest Expense $11,829.73 Record interest expense ($295,743.24 x 4%)
Discount on Bonds Payable $3,704.73 Amortize discount ($11,829.73 - $8,125)
Cash $8,125 Record outflow of cash made in payment of interest

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