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Reco r ding Bond Issue and Fi r st Inte r est P ayment with Discount (Effecti v e-Inte r est Amortization) On January 1, 2009, Hyde Corporation sold a $600,000, 7.5 percent bond issue (8.5 percent market rate). The bonds were dated January 1, 2009, pay interest each June 30 and December 31, and mature in four years. Required: 1. Give the journal entry to record the issuance of the bonds. 2 . Give the journal entry to record the interest payment on December 31, 2009. Use effective-interest amortization. 3. Show how the bond interest expense and the bonds payable should be reported on the June 30, 2009, income statement and balance sheet.
Step 1. Face value of bond = $600,000 Interest is paid semi anually on June 30 and Dec 31 Interest rate=7.5% Market interest rate=8.5%/2 Maturity=4×2=8 periods Interest for 6 months = 600000x(7.5%/2)=22,500 Issue price=Present value of interest annuity + Present value of redemption amount =(interest x PVIFA (8.5%/2, 8) + (Redemption amount x PVIF (8.5%/2, 8) =(22500×6.66) + (600000×0.7168)=$579,930 Step 2. PVIFA (8.5%/2 , 8) = [(1+i)^n-1] / [i (1+i)^n] = [(1+0.0425)^8 -1] / [ 0.0425 * (1.0425^8)] = 6.66 PVIF (8.5%/2, 8)= 1/(1+i)^n = 1/(1.0425^8)=0.7168 Journal entry to record issuance of bonds Cash $579,930 Discount on bonds $20,070 Bonds payable $600,000 Step 3 (Using effective amortization) Interest expense=unpaid balance x…

ctive interest rate x (n/12) n=number of months in each interest period 579930 x 8.5% x (6/12) = $24647 Unpaid balance on June 30 2009 =$579930+$2417=$582077 Interest on Dec 31 2009 = 582077 x 8.5% x (6/12)=$24738 Amortization amount = interest expense – cash interest = 24738-22500=$2238 Step 4: Journal entry to record interest expense Interest expense $24738 Discount on bonds payable $2238 Cash $22500 Step 5 : Interest expense on june 30 2009 is $582077-$579930=$2147 Bonds payable=$582077

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