Account for bonds payable at a discount; amortize by the straight-line method

Requirements

1. Journalize the following transactions of Lamothe Communications, Inc.:

.:.

2. At December 31, 2012, after all year-end adjustments, determine the carrying amount of Lamothe Communications bonds payable, net.

3. For the six months ended July 1, 2012, determine the following for Lamothe Communications Inc:

a. Interest expense

b. Cash interest paid

What causes interest expense on the bonds to exceed cash interest paid?

SOLUTION:

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Journal
DATE	DATE	ACCOUNT TITLES AND EXPLANATION	DEBIT	CREDIT
2012	2012
Jan.	1	Cash ($3,000,000 × .94)	2,820,000
		Discount on Bonds Payable	180,000
		Bonds Payable		3,000,000
		To issue bonds at a discount.	To issue bonds at a discount.
July	1	Interest Expense	129,000
		Cash ($3,000,000 × .08 × 6/12)		120,000
		Discount on Bonds Payable
		($180,000 / 20)		9,000
		To pay interest and amortize bonds.	To pay interest and amortize bonds.
Dec.	31	Interest Expense	129,000
		Interest Payable ($3,000,000 × .08 × 6/12)		120,000
		Discount on Bonds Payable
		($180,000 / 20)……………………………		9,000
		To accrue interest and amortize bonds.	To accrue interest and amortize bonds.
2013	2013
Jan.	1	Interest Payable……………………………….	120,000
		Cash…………………………………………		120,000
		To pay interest.
2022	2022
Jan.	1	Bonds Payable…………………………………	3,000,000
		Cash………………………………………….		3,000,000
		To pay off bonds at maturity.