# On January 1, 2020, Lock Corporation issued $1,800,000 face value, 5%, 10-year bonds at... ## Question: On January 1, 2020, Lock Corporation issued$1,800,000 face value, 5%, 10-year bonds at $1,667,518. This price resulted in an effective-interest rate of 6% on the bonds. Lock uses the effective-interest method to amortize bond premium or discount. The bonds pay annual interest January 1. a) Prepare the journal entry to record the issuance of the bonds on January 1, 2020. b) Prepare an amortization table through December 31, 2022 (three interest periods) for this bond issue. c) Prepare the journal entry to record the accrual of interest and the amortization of the discount on December 31, 2020. d) Prepare the journal entry to record the payment of interest on January 1, 2021. e) Prepare the journal entry to record the accrual of interest and the amortization of the discount or December 31, 2021. ## Bonds Payable: Bonds are long-term debt instruments issued by companies in order to raise capital. These instruments are characterized by their principal (maturity) values and their interest rates. The principal value must be repaid upon maturity while the interest rates determine the interest to be paid, usually periodically, over the bond's life. ## Answer and Explanation: #### Part a) Account Debit Credit Explanation Cash$1,667,518 Record inflow of cash from issuance
Discount on Bonds Payable $132,482 Record discount on bond issuance Bonds Payable$1,800,000 Record bonds payable at face value

#### Part b)

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 5% x Face) (Market 6% x Previous BV in G) (C - B) (Previous E - D) (F + E)
January 1, 2020 132,482.00 1,800,000.00 1,667,518.00
December 31, 2020 90,000.00 100,051.08 10,051.08 122,430.92 1,800,000.00 1,677,569.08
December 31, 2021 90,000.00 100,654.14 10,654.14 111,776.78 1,800,000.00 1,688,223.22
December 31, 2022 90,000.00 101,293.39 11,293.39 100,483.38 1,800,000.00 1,699,516.62

#### Part c)

Account Debit Credit Explanation
Interest Expense $100,051.08 Record interest expense according to effective interest method Discount on Bonds Payable$10,051.08 Amortize discount ($100,051.08 -$90,000)
Cash $90,000 Record outflow of cash after interest is paid #### Part e) Account Debit Credit Explanation Interest Expense$100,654.14 Record interest expense according to effective interest method
Discount on Bonds Payable $10,654.14 Amortize discount ($100,654.14 - $90,000) Interest Payable$90,000 Record interest to be paid on January 1