ACCT 201 Principles of Financial Accounting
Practice Exam - Chapter 10
Reporting & Analyzing Long-Term Liabilities
Dr. Fred Barbee

Solution to Short-Problem #2

Short Problem #2

On January 1, 2002, a company issued 10-year, 10% bonds payable with a par value of $500,000, and received $442,647 in cash proceeds. The market rate of interest at the date of issuance was 12%. The bonds pay interest semiannually on July 1 and January 1. The issuer uses the straight-line method for amortization. Prepare the issuer's journal entry to record the first semiannual interest payment.

Solution

Journal Entry
Bond Interest Expense
27,867.65

Discount on Bonds Payable

2,867.65

Cash

25,000.00

**Journal Entry**
Bond Interest Expense	27,867.65
Discount on Bonds Payable		2,867.65
Cash		25,000.00

Supporting Calculations
Cash payment: $500,000 x 10% x 1/2 hear = $25,000
Discount amortized: ($500,000 - $442,647) / 20 semiannual periods = $2,867.65
Interest expense: $25,000 + $2,867.65 = $27,867.65