Question

June 30, 2017, Brown corp issued 10,000,000 bonds with stated rate 8%

The bonds were sold at 9,200,000. The market interest rate of bonds with similar risk and maturity

is 10%. Interest is payable twice a year (Dec 31 and July 1). If the effective interest method is used, show journal entries

answer is

inter exp 460,000

------------Dis bond payable 60,000

------------Cash 400,000

Please, show me calculation of inter expense and dis bond payable

Answer 1

Par value of bonds = $10,000,000

Cash receipt from issue of bonds = $9,20,000

Discount on bonds payable = Par value of bonds - Cash receipt from issue of bonds

= 10,000,000-9,200,000

= $800,000

Semi-annual interest payment = 10,000,000 x 8% x 6/12

= $400,000

Interest expense on July 1 = Carrying value of bonds x Market interest rate x 6/12

= 9,200,000 x 10% x 6/12

= $460,000

Amortization of bonds discount on July 1 = Interest expense on July 1 - Semi-annual interest payment

= 460,000-400,000

= $60,000