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 |

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amount box does not require an entry, leave it blank.
2....

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expense for the first year. Round amounts to the nearest
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