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Bond Issue Costs and Premium or Discount Amortization

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1. CeCe Winans Corporation incurred the following costs in connection with the issuance of bonds: (1) printing and engraving costs, $12,860; (2) legal fees, $51,170, and (3) commissions paid to underwriter, $69,280.

2. George Gershwin Co. sold $2,106,000 of 12%, 9-year bonds at 102 on January 1, 2014. The bonds were dated January 1, 2014, and pay interest on July 1 and January 1. If Gershwin uses the straight-line method to amortize bond premium or discount, determine the amount of interest expense to be reported on July 1, 2014, and December 31, 2014.

3. Ron Kenoly Inc. issued $708,400 of 8%, 9-year bonds on June 30, 2014, for $554,992. This price provided a yield of 12% on the bonds. Interest is payable semiannually on December 31 and June 30. If Kenoly uses the effective-interest method, determine the amount of interest expense to record if financial statements are issued on October 31, 2014.

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Solution Summary

This solution illustrates which costs are capitalized as bond issue costs, and how to amortize a bond discount or premium using the straight-line and effective-interest methods. It even includes full amortization tables for each method.

See Also This Related BrainMass Solution

Bond Issuance and Calculation

Straight-line amortization of both
bond discount and bond premium
P1 P2 P3
Heathrow issues $2,000,000 of 6%, 15-year bonds dated January 1, 2004, that pay interest semiannually
on June 30 and December 31. The bonds are issued at a price of $1,728,224.
1. Prepare the January 1, 2004, journal entry to record the bonds' issuance.
2. For each semiannual period, compute (a) the cash payment, (b) the straight-line discount amortization,
and (c) the bond interest expense.
3. Determine the total bond interest expense to be recognized over the bonds' life.
4. Prepare the first two years of an amortization table like Exhibit 14.7 using the straight-line method.
5. Prepare the journal entries to record the first two interest payments.
6. Assume that the bonds are issued at a price of $2,447,990. Repeat parts 1 through 5.


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