Reporting Financial Statement Effects of Bond
On January 1, 2016, McKeown, Inc., issued $350,000 of 10%, 9-year bonds for $312,103, yielding a market (yield) rate of 12%. Semiannual interest is payable on June 30 and December 31 of each year.
a. Show computations to confirm the bond issue price.
b. Prepare journal entries to record the bond issuance, semiannual interest payment and discount amortization on June 30, 2016, and semiannual interest payment and discount amortization on December 31, 2016. Use the effective interest rate method.
Please show all calculations.
|Year and type of cashflow||Amount||Discount factor at 12%/2 =6%||Discounted cashflow|
|1-20 (Interest )||17,500||10.8276||189,483|
|20 (Principal )||350,000||0.35034||122,620|
|Total issue price||312,103|
Thus the issue price is justified.
|January 1, 2016||Cash Dr||312,103|
|Discount on Bonds Payable Dr||37,897|
|To Bonds Payable||350,000|
|June 30, 2016||Interest expense Dr (312,103×12%/2)||18,726.18|
|To Discount on Bonds Payable (Balancing figure)||1,226.18|
|Dec 31 2016||Interest expense Dr (312103+1226.18)×6%||18,800|
|To Discount on Bonds Payable||1300|
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