Question

# Amortize Discount by Interest Method On the first day of its fiscal year, Ebert Company issued...

Amortize Discount by Interest Method

On the first day of its fiscal year, Ebert Company issued \$14,000,000 of 5-year, 9% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 10%, resulting in Ebert receiving cash of \$13,459,436. The company uses the interest method.

a. Journalize the entries to record the following:

1. Sale of the bonds. Round amounts to the nearest dollar. If an amount box does not require an entry, leave it blank.

2. First semiannual interest payment, including amortization of discount. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

3. Second semiannual interest payment, including amortization of discount. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

b. Compute the amount of the bond interest expense for the first year. Round amounts to the nearest dollar.

 Annual interest paid \$ Discount amortized Interest expense for first year \$

 a 1 Cash 13459436 Discount on Bonds payable 540564 Bonds payable 14000000 2 Interest expense 672972 =13459436*10%*6/12 Discount on Bonds payable 42972 Cash 630000 =14000000*9%*6/12 3 Interest expense 675120 =(13459436+42972)*10%*6/12 Discount on Bonds payable 45120 Cash 630000 b Annual interest paid 1260000 =630000+630000 Discount amortized 88092 =42972+45120 Interest expense for first year 1348092