On the first day of its fiscal year, J Co. issued $1,000,000 of five-year, 8% bonds to finance the remodeling of an office building. Interest is payable semiannually. The bonds were issued at an effective interest rate of 11%, resulting in J Co. receiving cash of $886,935. Give the account to be debited, the account to be credited, and the amount to journalize the amortization of the discount/premium at the end of the first year using the straight-line method of amortization. (Amortization of discount/premium is to be recorded annually.) All amounts are to be rounded to the nearest dollar.
Journal Entry in the Books of J Co
Accounts Tittles and explanations |
Debit ($) |
Credit ($) |
Interest Expenses A/c |
102,613 |
|
To Discount on Bond Payable A/c |
22,613 |
|
To Cash A/c [ $10,00,000 x 8% ] / 2 |
80,000 |
|
[ Journal entry to record the amortization of the discount on issue of bond using the straight-line method of amortization] |
||
Discount on Issue of Bond
= Face Value of the bond – Issue Price
= $10,00,000 - $886,935
= $113,065
Amortization of Discount on Issue of Bond during each semi annual period using straight line method of amortisation
= $113,065 / 5 Periods
= $22,613
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