Answer:
Explanation:
We are to prepare the journal entries for the following :
January 1, 2016 Sold the bonds at an effective rate of 10%
December 31, 2016 First interest payment using the effective interest
method
December 31, 2016 Amortization of bond issue costs using the straight-
line method
December 31, 2017 Second interest payment using the effective interest
method
December 31, 2017 Amortization of bond issue costs using the straight-line
method
The Journal entries can be prepared in an illustrative table format as shown below:
Date Account Title Debit ($) Credit ($)
2016 Cash 962091.83
Jan 1 Discount on bonds payable
$( 1000000 - 962091.83) 37908.17
Bond Payable 1000000.00
TO record issue of bonds
Jan 1 Deferred Bond Issue 18000.00
Cash 18000.00
2016 Interest expense
(962091.83 × 10%) 96209.18
Dec 31 Discount on bond payable 6209.18
Cash (1000000 × 9%) 90000.00
TO record the payment of semi-annual interest
2016 Interest expense
(18000 + 5 years) 3600.00
Dec 31 Deferred bond issue costs 3600.00
TO record the amortization of bonds on issue costs
2017 Interest expense
(962091.83 + 6209.18) × 10% 96830.10
Dec 31 Discount on bond payable 6830.10
Cash (1000000 × 9%) 90000.00
TO record the payment of semi-annual interest
2017 Interest expense
(18000 + 5 years) 3600
Dec 31 Deferred bond issue costs 3600.00
TO record the amortization of bonds on issue costs
When we use an effective interest method, the debit amount in the discount on bonds payable is moved to the interest account.
Under this approach, the amount of interest expense over a period of calculation corresponds to the value of the bond book value at the beginning of the accounting period.
As a result, as the Book value of the bond increases, the value of the interest rate increases.
When selling a discounted bond, the value of the bond discount should be reduced on interest costs over the life of the bond.
Therefore, amortization causes interest expense for each accounting period to exceed the amount of interest payable during each year of life of the bond.
The journal entries of the amortization amount using the straight-line method is attached in the given image.
To learn more about effective interest method, refer:
https://brainly.com/question/25654055
