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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Amortize discount by interest method

On the first day of its fiscal year, Ebert Company issued $50,000,000 of 10-year, 7% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 9%, resulting in Ebert Company receiving cash of $43,495,895. The company uses the interest method.

a. Journalize the entries to record the following:

1. Sale of the bonds.

2. First semiannual interest payment, including amortization of discount. Round to the nearest dollar.

3. Second semiannual interest payment, including amortization of discount. Round to the nearest dollar.

b. Compute the amount of the bond interest expense for the first year.

c. Explain why the company was able to issue the bonds for only $43,495,895 rather than for the face amount of $50,000,000.

a (1)

To determine

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Discount on bonds payable: It occurs when the bonds are issued at a low price than the face value.

Effective-interest amortization method: Effective-interest amortization methodit is an amortization model that apportions the amount of bond discount or premium based on the market interest rate.

In this method, first, interest expense is calculated based on the current carrying amount and market interest rate and cash interest payment is calculated based on the face value amount and stated interest rate and then, the different between the cash interest payment and interest expense is amortized as a decrease to the discount or premium.

To Journalize:  Sale of the bonds.

Explanation

Journalize sale of bonds.

Date Account Title and Explanation Post Ref.

Debit

($)

Credit

($)

  Cash   43,495,895  
    Discount on Bonds Payable (1)   6,504,105  
    Bonds Payable     50,000,000
    (To record the issue of bonds at discount)      

Table (1)

Working note:

Calculate discount on bonds payable...

b (2)

To determine

To Journalize: First semiannual interest payment and amortization of discount on bonds.

c (3)

To determine

To Journalize: Second semiannual interest payment and amortization of discount on bonds.

(b)

To determine
The amount of bond interest expense for first year.

C.

To determine

To explain: The reason why the company was able to issue the bonds for $43,495,895 rather than $50,000,000.

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