Question

On January 1, 2016, Everly Bottle Company sold $3,000,000 in long-term bonds for $2,631,300. The bonds will mature in 10 years and have a stated interest rate of 8% and a market yield rate of 10%. The bonds pay interest annually on December 31 of each year. The bonds are to be accounted for under the effective-interest method. Construct a bond amortization table for the first three years, 2016, 2017 and 2018 to indicate the amount of interest expense and discount amortization at each December 31.

                                                                                          Amortization of     Carrying Amount

         Date               Cash Interest          Interest Expense      Bond Discount           of Bonds      

        

         01/01/16                                                                                                                      

        

         12/31/16                          

        

         12/31/17                          

        

         12/31/18                          

        

Make journal entries at interest payment dates of 12/31/16 and 12/31/17.

12/31/16

12/31/17

Answer 1

AT 12/31/16

interest expense 22120 DR

to interest payable 20000 Cr

To Discount on bond payable 2120 Cr

Interest Expense = 265443/12 = 22120

interest payable = 240000/12 = 20000

AT 12/31/17

interest expense 22332 DR

to interest payable 20000 Cr

To Discount on bond payable 2332

Date	Cash credit	debit interest expense	Credit bond discount	carrying amount
01/01/16				2631300
12/31/16	240000	263130	23130	2654430
12/31/17	240000	265443	25443	2679873

Cr

Interest expense = 267987/12 =22332