Q16SE_2 - Horngren'S Financial And Managerial Accounting

Question

Using the effective-interest amortization method

On December 31, 2018, when the market interest rate is 8%, Biggs Realty issues

\(450,000 of 5.25%, 10-year bonds payable. The bonds pay interest semiannually. The

present value of the bonds at issuance is \)365,732.

Requirements

1. Prepare an amortization table using the effective interest amortization method for

the first two semiannual interest periods. (Round to the nearest dollar.)

2. Using the amortization table prepared in Requirement 1, journalize issuance of the

bonds and the first two interest payments.

Step-by-Step Solution

Answer

The cash account is debited with $365,732, and the 8% bond payableaccount is credited with $365,732.

Step 1: Definition of journal entry

Journal entry is the primary entry which is made by the accountant in the books of accounts to record the transactions.

Step 2: Journal entries and the payment of interest

Date	Particulars	Debit	Credit
December 31, 2018	Cash	$365,732
	8% Bonds Payable		$365,732
	(Being issue entry of the bonds)
June 30, 2019	Interest Expense	$14,630
	Discount on Bonds		$2,818
	Cash		$11,812
	(Being entry for the payment of interest)
December 31, 2019	Interest Expense	$18,427
	Discount on Bonds		$6,615
	Cash		$11,812
	(Being entry for the payment of interest)