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Calculate interest expense; prepare journal entries

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Spring Water Company Ltd. needed to raise $5.8 million of additional capital to finance the expansion of its bottled water company. After consulting an investment banker and the company's VP Finance, it decided to issue bonds. The bonds had a maturity value of $5.8 million and an annual interest rate of 4%, paid interest semi-annually on June 30 and December 31, and matured on December 31, 2017. The bonds were issued on January 1, 2008, for $5,347,914, which represented a yield of 5%.

Calculate the interest expense for the first year and show the journal entries to record the interest expense and the corresponding interest payments.

Total interest expense for year 1: $ __________

June 30 Interest expense __________
Cash 116000
Discount on bonds payable _________

Dec. 31 Interest expense _________
Cash 116000
Discount on bonds payable ________

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Solution Summary

The expert calculates interest expenses and prepares journal entries.

Solution Preview

Solution is provided in a separate excel file attached. It contains the following parts.

1 Data provided

2 Amortization Table-Effective interest rate method of amortization

Journal entries for recording Bond transaction and amortization of Discount on Effective rate method

Note 1 : Entry for amortization will be recorded in the same manner every semi annual interval in 20 ...

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