Question
Discount Amortization On the first day of the fiscal year, a company issues a $5,500,000, 10%,...
Discount Amortization
On the first day of the fiscal year, a company issues a $5,500,000, 10%, 6-year bond that pays semiannual interest of $275,000 ($5,500,000 × 10% × ½), receiving cash of $4,826,906.
Journalize the first interest payment and the amortization of the related bond discount. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.
| Interest Expense | |||
| Discount on Bonds Payable | |||
| Cash |
Can someone show me how to do this? I am lost!
Homework Answers
Answer #1
See, since the market rate of interest is not given in the question, we can't use effective interest rate method for amortization of Bond Discount.
Bond Discount is to be amortized using straight line method.
Bond Discount = $5,500,000 - $4,826,906 = $673,094
Tenure of the Bond = 6 years
No. of 6 month periods = 6 x 2 = 12 periods.
Discount amortization for every 6 months = $673,094 
12 = $56,091.167 = $56,091
The journal entry would be as follows:
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