Question

Reporting Financial Statement Effects of Bond Transactions
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.

Required
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.

Answer 1

Computation of Issue price of the Bond ($)

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.

2.

Journal Entries ($)

January 1, 2016	Cash Dr	312,103
	Discount on Bonds Payable Dr	37,897
	To Bonds Payable		350,000
	(Issued)
June 30, 2016	Interest expense Dr (312,103×12%/2)	18,726.18
	To Discount on Bonds Payable (Balancing figure)		1,226.18
	To Cash		17,500.00
	(Interest expense)
Dec 31 2016	Interest expense Dr (312103+1226.18)×6%	18,800
	To Discount on Bonds Payable		1300
	To Cash		17,500
	(Interest expense)