On January 1, 2019, Canglon, Inc., issues 10%, 5-year bonds with a face value of $150,000 when the effective rate is 12%. Interest is to be paid semiannually on June 30 and December 31. Assume Canglon uses the effective interest method to amortize the discount.

Required:

Prepare the journal entry to record the first interest payment on June 30, 2019.

June 30, 2019, first coupon payment on bonds issued January 1, 2019:

Dr Interest expense 8,338

Cr Cash 7,500

Cr Discount on bonds payable 838

Explanation:

bond's face value = $150,000

coupon rate = 10% / 2 = 5%

n = 5 years x 2 = 10 semiannual coupons

we must first determine the market price of the bonds:

coupon rate = 6%

n = 10

payments 1 - 9 = $7,500

payment 10 = $157,500

using an excel spreadsheet we can calculate the resent value of the annuity = $138,960

=NPV (6%,7500 ... 8 more times, 157500) = $138,960

now to determine the amortization using the effective interest method:

($138,960 x 6%) - ($150,000 x 5%) = $8,337.60 - $7,500 = $837.60 ≈ $838

the journal entry should be:

June 30, 2019, first coupon payment on bonds issued January 1, 2019:

Dr Interest expense 8,338

Cr Cash 7,500

Cr Discount on bonds payable 838