On the first day of the fiscal year, a company issues a $8,400,000, 12%, 10-year bond...

4.3 Ratings (900 Votes)

First we calculate effective interest rate of bond. (Compounded half yearly)

Formula: [Half yearly payment+(Maturity value of bond- Amount received )/( compounding period *2)]/(Maturity value of bond+Amount received )/2

= [504000+(8400000-7,115,493)/(10*2)]/(8400000+7,115,493)/2

=(504000+ 64225.35)/7757746.5 = 7.3246% (Close to Effective interest rate 7.5%)

1.Interest Expense is calculated on the basis of last year carrying amount.

2. Discount Amortized= Interest Expense - Payment

Journal entry for first interest payment

Interest Expense A/c Dr $533662

To Discount On Bond payable $29662

To Bank $504000

( Being half yearly interest on bond paid)

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