On January 1 2016 for 179 million Marker Company issued 8 bo

On January 1, 2016, for $17.9 million, Marker Company issued 8% bonds, dated January 1, 2016, with a face amount of $19.9 million. For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. (If no entry is required for a transaction/event, select \"No journal entry required\" in the first account field. Enter your answers in whole dollars.)

Prepare the journal entry to record interest on June 30, 2016, using the effective interest method.

Prepare the journal entry to record interest on December 31, 2016, using the effective interest method.

On January 1, 2016, for $17.9 million, Marker Company issued 8% bonds, dated January 1, 2016, with a face amount of $19.9 million. For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. (If no entry is required for a transaction/event, select \"No journal entry required\" in the first account field. Enter your answers in whole dollars.)

Solution

Solution:

Par Value of the bonds = $19,900,000

Semi Annual Coupon Interest = $19,900,000 x 8% x ½ = $796,000

Issue Price of the bonds = $17,900,000

Since Issue price is less than Par Value, Bonds are issued at discount.

Discount on Bonds Payable = $19,900,000 - $17,900,000 = $2,000,000

The discount on bonds payable is to be amortized over the life of the bond by using effective interest method.

Effective Interest Rate (market yield) = 10% per annum or 5% semi annually

Bond Discount Amortization Schedule for the first 2 interest periods

Date

Interest Payable

Interest Expenses (Book Value of bonds at the beginning of year @ 5% semiannual effective interest rate)

Amortization of Discount on Bonds Payable (Interest Expenses - Interest Payable)

Discount on Bonds Payable Ending Balance

Par Value of Bonds

Book Value of the bonds at the end of year

Jan 1, 2016

$0

$0

$2,000,000

$19,900,000

$17,900,000

June 30,2016

$796,000

$895,000

$99,000

$1,901,000

$19,900,000

$17,999,000

Dec 31,2016

$796,000

$899,950

$103,950

$1,797,050

$19,900,000

$18,102,950

Journal Entries to record interest on June 30, 2016, using effective interest method.

Date

Account Title

Debit

Credit

June 30, 2016

Interest Expenses    Dr.

$895,000

   To Discount on Bonds Payable

$99,000

   To Interest Payable to Bond Holders

$796,000

(Being interest expenses are recorded)

Journal Entries to record interest on December 31, 2016, using effective interest method.

Dec 31, 2016

Interest Expenses    Dr.

$899,950

   To Discount on Bonds Payable

$103,950

   To Interest Payable to Bond Holders

$796,000

(Being interest expenses are recorded)

Bond Discount Amortization Schedule for the first 2 interest periods
Date	Interest Payable	Interest Expenses (Book Value of bonds at the beginning of year @ 5% semiannual effective interest rate)	Amortization of Discount on Bonds Payable (Interest Expenses - Interest Payable)	Discount on Bonds Payable Ending Balance	Par Value of Bonds	Book Value of the bonds at the end of year
Jan 1, 2016		$0	$0	$2,000,000	$19,900,000	$17,900,000
June 30,2016	$796,000	$895,000	$99,000	$1,901,000	$19,900,000	$17,999,000
Dec 31,2016	$796,000	$899,950	$103,950	$1,797,050	$19,900,000	$18,102,950