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14 November, 15:34

On January 1, 2019, Electro Inc. issued $740,000 of 7.5%, four-year bonds that pay interest semiannually on June 30 and December 31. They are issued at $680,186 and their market rate is 10% at the issue date. After recording the entry for the issuance of the bonds, Bonds Payable had a balance of $740,000 and Discount on Bonds Payable had a balance of $59,814. Electro uses the effective interest bond amortization method. The first semiannual interest payment was made on June 30, 2019.

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  1. 14 November, 16:41
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    Cash 680,186 debit

    discount on BP 59,814 debit

    Bonds payable 740,000 credit

    --to record issuance of the bonds--

    interest expense 34009.3 debit

    discount on BP 6259.3 credit

    cash 27750 credit

    --to record first payment of the bonds--

    Explanation:

    procceds 680,186

    face value 740,000

    discount on bonds payable 59,814

    bond rate (semi-annually) 7.5% / 2 = 0.0375

    market rate (semi-annually) 10% / 2 = 0.05

    The first payment will be:

    cash proceeds: face value x bond rate:

    740,000 x 0.0375 = 27,750

    interest expense: carrying value x market rate

    680,186 x 0.05 = 34,009.3

    amortization on discount on BP:

    34,009.3 - 27,750 = 6259.3
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