Question

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	$

Answer 1

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