Maharlika Corporation issued a 10-year $1

Prepare the journal entries for:
(a) to record the issuance of the bonds.

First, we need to calculate how much the bonds have been issued by using the formula as follows: -

where B is the issued price
C is the coupon payment
r is the effective rate
n is the period

As the payment is semi-annual, the effective rate used must be divide by 2, that is equal to 4%. The period must also multiply by 2, that is equal to 20. Coupon payment must also be paid as semi-annual, that is divided by 2 (1.5 million x 6% x 6/12 = 45,000)

The issued price of the bond is equal to

B = 45,000 x [1 - 1 ] + 1.5 million
(1.04)20 (1.04)20
0.04

B = 45,000 x 13.5903 + 1.5 million x 0.4564
B = 1,296,163.5

The discount amount is 1,500,000 - 1,296,163.5 = 203,836.5

Cash 1,296,163.50
Discount on Bonds Payable 203,836.50
Bonds Payable 1,500,000

(b) to record the first three semi-annual interest payments using the effective interest method to amortize any discount or premium

What is the interest expense at the end of period one?
1,296,163.50 x 8% x 6/12 = 51,846.54

What is the interest payment at the end of period one?
1,500,000 x 6% x 6/12 = 45,000

51,846.54 - 45,000 =6,846.54 amortization

Effective Interest Method : Discount

You need to add the amortization back to the carrying value of the previous period.

End of Period Carrying Value Interest Cash Amortization
expense Paid

Issue Date 1,296,163.50
1 1,303,010.04 51,846.54 45,000 6,846.54
2 1,310,130.44 52,120.40 45,000 7,120.40
3 1,317,535.66 52,405.22 45,000 7,405.22

Interest Expense 51,846.54
Discount on Bonds Payable 6,846.54
Cash 45,000.00

Interest Expense 52,120.40
Discount on Bonds Payable 7,120.40
Cash 45,000.00

Interest Expense 52,405.22
Discount on Bonds Payable 7,405.22
Cash 45,000.00