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On January 1, 2016, for $17.9 million, Marker Company issued 8% bonds, dated January 1, 2016,...

Question:

On January 1, 2016, for $17.9 million, Marker Company issued 8% bonds, dated January 1, 2016, with a face amount of $19.9 million.

For bonds of similar risk and maturity, the market yield is 10%.

Interest is paid semi-annually on June 30 and December 31.

Enter your answers in whole dollars.

Required:

1. Prepare the journal entry to record interest on June 30, 2016, using the effective interest method.

2. Prepare the journal entry to record interest on December 31, 2016, using the effective interest method.

Bonds:

Bonds are long-term debt instruments which are issued by companies to garner capital. Bonds are characterized by their maturity values (principal) and their interest rates which dictate the cash to be paid to investors in return for their capital. The issuance price of a bond is determined by the bond's attractiveness in comparison to other instruments on the market.

Answer and Explanation:

Question 1.

Prepare the journal entry to record interest on June 30, 2016, using the effective interest method.

Date Account Debit Credit Explanation
June 30, 2016 Interest Expense $895,000 Record interest expense using effective interest rate method (5% market rate x $17.9 million carrying value)
Discount on Bonds Payable $99,000 Record the discount amortization ($895,000 - $796,000)
Cash $796,000 Record cash paid for interest (4% stated rate x $19.9 million face value)

Question 2.

Prepare the journal entry to record interest on December 31, 2016, using the effective interest method.

Date Account Debit Credit Explanation
June 30, 2016 Interest Expense $899,950 Record interest expense using effective interest rate method (5% market rate x ($17.9 million + $99,000) carrying value)
Discount on Bonds Payable $103,950 Record the discount amortization ($899,950 - $796,000)
Cash $796,000 Record cash paid for interest (4% stated rate x $19.9 million face value)

Learn more about this topic:

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Long-Term Debt: Definition, Cost & Formula

from Financial Accounting: Help and Review

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