Question

On January 1, 2015, Jørgensen Inc. in Copenhagen, Denmark, issued kr. 800,000 of five-year, 4% bonds to yield a market interest rate of 5%, which resulted in a discount price of 95.62. Interest is paid semi-annually on January 1 and July 1. (Currency in Danish kroner, kr.)

Instructions:

Work out a complete amortization schedule on the bonds. (30%)
Prepare the journal entries to record the following: (20%)
The issuance of the bonds on January 1, 2015
The payment of interest and amortization on July 1, 2015
The final entry that would be made after the last payment of interest when the bonds mature on January 1, 2020

* Round all amounts to the nearest Danish kroner (i.e., do not leave any decimals).

Answer 1

	(Carrying value x 2.5%)	(800000 x 2%)	interest exp - Interest paid	Discount - Discount amortization	Carrying value + Discount amortization
Time	Interest expense	Interest Paid	Discount amortization	Discount	Carrying Value
Jan 1, 2015				35,040	764,960
Jul 1, 2015	19,124	16,000	3,124	31,916	768,084
Jan 1, 2016	19,202	16,000	3,202	28,714	771,286
Jul 1, 2016	19,282	16,000	3,282	25,432	774,568
Jan 1, 2017	19,364	16,000	3,364	22,068	777,932
Jul 1, 2017	19,448	16,000	3,448	18,619	781,381
Jan 1, 2018	19,535	16,000	3,535	15,085	784,915
Jul 1, 2018	19,623	16,000	3,623	11,462	788,538
Jan 1, 2019	19,713	16,000	3,713	7,748	792,252
Jul 1, 2019	19,806	16,000	3,806	3,942	796,058
Jan 1, 2020	19,942	16,000	3,942	0	800,000
Carrying Value = Book value x 95.62%; 800000 x 95.62% = 764,960
Since interest is paid half yearly, coupon rate 4% is divided by 2, 2%, and market rate by 2, that is 5%, 2.2.5%
Journal Entry:
Date	Particulars			Dr(Kr)	Cr(Kr)
Jan 1, 2015	Cash			764,960
	Discount on bonds payable			35,040
	Bonds Payable				800,000
	(to record the issuance of bonds with discount)
Jul 1, 2015	Interest Expense			19,124
	Discount on bonds payable				3,124
	Cash				16,000
	(To record the interest expense and discount amortization)
Jan 1, 2020	Bonds Payable			800,000
	Cash				800,000
	(To record the maturity of bonds)