Effective Interest Method for Lucy Corporation issuance of bonds
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On January 1, 2007, Lucy Corporation issued $1,200,000 face value, 7% 10 -year
bonds at $1,119,479 This price resulted in an effective-interest rate of 8% on the bonds.
Lucy uses the effective-interest method to amortize bond premium or discount. The bonds pay annual interest
January 1.
Instructions: (Round all computations to the nearest dollar.)
(a) Prepare the journal entry to record the issuance of the bonds on January 1, 2007.
01/01/07 Account title Amount
Account title Amount
Account title Amount
(b) Prepare an amortization table through December 31, 2009 (three interest periods) for this bond issue.
LUCY CORP.
Bond Discount Amortization
Effective-Interest Method—Annual Interest Payments
7% Bonds Issued at 8%
(A) (B) (C) (D) (E)
"Annual
Interest
Periods" "Interest
to be
Paid" "Interest
Expense
to be
Recorded" "Discount
Amor-
tization
(B) - (A)" "Unamor-
tized
Discount
(D) - (C)" "Bond
Carrying
Value
($1,200,000 - D)"
Issue date
1
2
3
(c) Prepare the journal entry to record the accrual of interest and the amortization of the discount on December 31, 2007.
12/31/07 Account title Amount
Account title Amount
Account title Amount
(d) Prepare the journal entry to record the payment of interest on January 1, 2008.
01/01/08 Account title Amount
Account title Amount
(e) Prepare the journal entry to record the accrual of interest and the amortization of the discount on December 31, 2008.
12/31/08 Account title Amount
Account title Amount
Account title Amount
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Solution Summary
The effective interest method for Lucy Corporation issuance of bonds is examined.
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Solution is provided in a separate excel file attached in the following parts.
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(a) Journal ...
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