Question

On January 1, a business issues $100,000 face value, 5 year, 10% contract rate bonds dated January 1. Interest is payable ANNUALLY each December 31. The bonds were issued at a discount of $7,210 to reflect a market interest rate of 12%.

Prepare the necessary journal entries to record total interest expense for the FIRST interest period.

Answer 1

Par value of bonds = $100,000

Contract rate = 10%

Bond discount = $7,210

Issue price = Par value of bonds - Bond discount

= 100,000 - 7,210

= $92,790

Cash interest payment = Par value of bonds x Contract rate

= 100,000 x 10%

= $10,000

Market interet rate = 12%

First year interest expense = Issue price x Market interet rate

= 92,790 x 12%

= $11,135

Amortization of bond discount = First year interest expense - Cash interest payment

= 11,135 - 10,000

= $1,135

Journal

Account Title and Explanation	Debit	Credit
Interest expense	11,135
Discount on bonds payable		1,135
Cash		10,000

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