Question

On the first day of its fiscal year, Ebert Company issued $12,000,000 of 5-year, 9% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 11%, resulting in Ebert receiving cash of $11,095,480. The company uses the interest method.

Journalize the entries to record the following:

1. Sale of the bonds. Round amounts to the nearest dollar. If an amount box does not require an entry, leave it blank.

2. First semiannual interest payment, including amortization of discount. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

3. Second semiannual interest payment, including amortization of discount. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

b. Compute the amount of the bond interest expense for the first year. Round amounts to the nearest dollar. Using the following:

Annual interest paid
Discount amortized
Interest expense for first year

Answer 1

Jounral entry :

Date	accounts & explanation	debit	credit
	Cash	11095480
	Discount on bonds payable	904520
	Bonds payable		12000000
	(To record bonds issue)
	Interest expense (11095480*11%*6/12)	610251
	Discount on bonds payable		70251
	Cash (12000000*9%*6/12)		540000
	(To record interest paid)
	Interest expense (11095480+70251)*11%*6/12	614115
	Discount on bonds payable		74115
	Cash		540000
	(To record interest paid)

b) Calculate interest expense :

Amount interest paid (540000*2)	1080000
Discount amortized (70251+74115)	144366
Interest expense	1224366