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3 December, 20:13

On January 1, 2019, Canglon, Inc., issues 10%, 5-year bonds with a face value of $150,000 when the effective rate is 12%. Interest is to be paid semiannually on June 30 and December 31. Assume Canglon uses the effective interest method to amortize the discount.

Required:

Prepare the journal entry to record the first interest payment on June 30, 2019.

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  1. 3 December, 20:20
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    June 30, 2019, first coupon payment on bonds issued January 1, 2019:

    Dr Interest expense 8,338

    Cr Cash 7,500

    Cr Discount on bonds payable 838

    Explanation:

    bond's face value = $150,000

    coupon rate = 10% / 2 = 5%

    n = 5 years x 2 = 10 semiannual coupons

    we must first determine the market price of the bonds:

    coupon rate = 6%

    n = 10

    payments 1 - 9 = $7,500

    payment 10 = $157,500

    using an excel spreadsheet we can calculate the resent value of the annuity = $138,960

    =NPV (6%,7500 ... 8 more times, 157500) = $138,960

    now to determine the amortization using the effective interest method:

    ($138,960 x 6%) - ($150,000 x 5%) = $8,337.60 - $7,500 = $837.60 ≈ $838

    the journal entry should be:

    June 30, 2019, first coupon payment on bonds issued January 1, 2019:

    Dr Interest expense 8,338

    Cr Cash 7,500

    Cr Discount on bonds payable 838
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