On January 1, 2016, Knorr Corporation issued $1,000,000 of 9%, 5-year bonds dated January 1, 2016. The bonds pay interest annually on December 31. The bonds were issued to yield 10%. Bond issue costs associated with the bonds totaled $18,000. Required: Prepare the journal entries to record the following: January 1, 2016 Sold the bonds at an effective rate of 10% December 31, 2016 First interest payment using the effective interest method December 31, 2016 Amortization of bond issue costs using the straight-line method December 31, 2017 Second interest payment using the effective interest method December 31, 2017 Amortization of bond issue costs using the straight-line method

Explanation:

We are to prepare the journal entries for the following :

January 1, 2016             Sold the bonds at an effective rate of 10%

December 31, 2016       First interest payment using the effective interest                  

                                       method

December 31, 2016       Amortization of bond issue costs using the straight-

                                       line method

December 31, 2017       Second interest payment using the effective interest

                                      method

December 31, 2017      Amortization of bond issue costs using the straight-line

                                      method

The Journal entries can be prepared in an illustrative table format as shown below:

Date       Account Title                            Debit  ($)             Credit ($)

2016        Cash                                        962091.83

Jan 1      Discount  on bonds payable

             $( 1000000 - 962091.83)         37908.17

            Bond Payable                                                         1000000.00

            TO record issue of  bonds

Jan 1       Deferred Bond Issue                 18000.00

              Cash                                                                          18000.00

2016      Interest expense            

             (962091.83 × 10%)                    96209.18

Dec 31   Discount on bond payable                                          6209.18

             Cash  (1000000 × 9%)                                               90000.00

            TO record the payment of semi-annual interest

2016      Interest expense  

             (18000 + 5 years)                        3600.00

Dec 31    Deferred bond issue costs                                        3600.00

            TO record the amortization of bonds on issue costs

2017     Interest expense

            (962091.83 + 6209.18) × 10%       96830.10

Dec 31    Discount on bond payable                                         6830.10

             Cash  (1000000 × 9%)                                               90000.00

            TO record the payment of semi-annual interest

2017   Interest expense

          (18000 + 5 years)                            3600

Dec 31    Deferred bond issue costs                                        3600.00

            TO record the amortization of bonds on issue costs

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