Great Lake Glassware Company issues $ 1,184,000 of its 10​%, 10-year bonds at 95 on February​ 28, 2024. The bonds pay interest on February 28 and August 31. Assume that Great Lake uses the straight-line method for amortization. The journal entry to record the first interest payment on August​ 31, 2024 includes a​ ________.

Answer 1

To record the first interest payment on August 31, 2024, we need to calculate the cash interest payment, the amortization of the bond discount, and then create the journal entry for the transaction.

1. Calculate the Cash Interest Payment: The bonds are issued at 10% interest on the face value of $1,184,000. The cash interest payment is calculated as follows:

   \[ \text{Cash Interest Payment} = \text{Face Value} \times \text{Interest Rate} \times \text{Time Period} \] Since the bonds pay interest semi-annually, we will use half of the annual rate:

   \[ \text{Cash Interest Payment} = 1,184,000 \times 10% \times \frac{6}{12} = 1,184,000 \times 0.10 \times 0.5 = 59,200 \]

2. Determine the Bond Discount: The bonds were issued at 95, which means they were issued at a discount. The face value is $1,184,000, and they were issued for 95% of that amount.

   \[ \text{Issue Price} = 1,184,000 \times 0.95 = 1,124,800 \] \[ \text{Bond Discount} = \text{Face Value} - \text{Issue Price} = 1,184,000 - 1,124,800 = 59,200 \]

3. Amortization of Bond Discount: Since the bonds have a term of 10 years and pay interest semi-annually, there will be 20 interest payments. Using the straight-line method, the discount amortization per period will be:

   \[ \text{Amortization per Period} = \frac{\text{Total Discount}}{\text{Number of Periods}} = \frac{59,200}{20} = 2,960 \]

4. Journal Entry: The journal entry on August 31, 2024, to record the interest payment includes the cash interest payment, the amortization of the bond discount, and the corresponding accounts.

   • Debit: Interest Expense (which increases by the cash interest payment + amortization of the discount)
   • Credit: Cash (for cash interest payment)
   • Credit: Discount on Bonds Payable (to reduce the bond discount)

The journal entry will look as follows:

Date          Account Titles                      Debit       Credit
August 31, 2024     Interest Expense              62,160
                    Cash                                       59,200
                    Discount on Bonds Payable                  2,960

Therefore, the journal entry to record the first interest payment on August 31, 2024, includes a debit to Interest Expense for $62,160, a credit to Cash for $59,200, and a credit to Discount on Bonds Payable for $2,960.