Question

Bond Discount, Entries for Bonds Payable Transactions, Interest Method of Amortizing Bond Discount

On July 1, Year 1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $36,000,000 of 20-year, 11% bonds at a market (effective) interest rate of 14%, receiving cash of $28,802,160. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

Required:

For all journal entries: For a compound transaction, if an amount box does not require an entry, leave it blank.

1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds.

Year 1, July 1

2. Journalize the entries to record the following:

a. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond discount, using the interest method. (Round to the nearest dollar.)

Year 1, Dec. 31

b. The interest payment on June 30, Year 2, and the amortization of the bond discount, using the interest method. (Round to the nearest dollar.)

Year 2, June 30

3. Determine the total interest expense for Year 1.

Answer 1

1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds.

Year 1, July 1	Cash	28802160
	Discount on bonds payable	7197840
	Bonds payable		36000000

2. Journalize the entries to record the following:

a. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond discount, using the interest method. (Round to the nearest dollar.)

Year 1, Dec. 31	Interest expense	2016151
	Discount on bonds payable		36151
	Cash		1980000

b. The interest payment on June 30, Year 2, and the amortization of the bond discount, using the interest method. (Round to the nearest dollar.)

Year 2, June 30	Interest expense	2018682
	Discount on bonds payable		38682
	Cash		1980000

3. Determine the total interest expense for Year 1.

Interest expense = 2016151