Question

Vaughn Ltd. issued a $135,000, 3-year, zero-interest bond dated January 1, 2017. The market interest rate...

Vaughn Ltd. issued a $135,000, 3-year, zero-interest bond dated January 1, 2017. The market interest rate for similar bonds was 8.25%. Assume the company used the effective interest method of amortization.

1. Prepare the journal entry for the issue of the bond.

2. Prepare a schedule of bond discount/premium amortization. (Round answers to 0 decimal places)

3. Prepare the journal entry at December 31, 2017, assuming the company’s year-end was December 31.

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Answer #1
Issue price:
Present value of maturity amount for Year-3 ($135000*PVF at Year-3 i.e.0.788345) 106426.6
Amortization of Discount:
Year Book value of Bonds in Beg Discount Amortized Book Value
at the end
1 106427 8780 115207
2 115207 9505 124712
3 124712 10288 135000
Journal Entry:
1. Issue of bonds:
Cash Account Dr. 106427
Discount on Bonds payable Dr. 28573
     Bonds payable 135000
2. For Year end entry:
Interest expense Dr. 8780
     Discount on Bonds payable 8780
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