On January 1, 2017, Ayayai Corporation issued $1,600,000 face value, 5%, 10- year bonds at $1,482,239. This price resulted in an effective-interest rate of 6% on the bonds. Ayayai uses the effective-interest method to amortize bond premium or discount. The bonds pay annual interest January 1. Prepare the journal entries to record the following transactions. (Round answers to 0 decimal places, e. g. 125. Credit account titles are automatically indented when amount is entered. Do not indent manually.)1. The issuance of the bonds on January 1, 2017.2. Accrual of interest and amortization of thepremium on December 31, 2017.3. The payment of interest on January 1, 2018.4. Accrual of interest and amortization of thepremium on December 31, 2018.

Ayayai Corporation

Journal Entries:

1. Issuance of bonds on January 1, 2017:

Debit Cash $1,482,239

Debit Bonds discount $117,761

Credit 10- year 5% Bonds payable $1,600,000

2. Accrual of interest and amortization of the discount on December 31, 2017:

Debit Interest expense $88,934

Credit Interest payable $80,000

Credit Amortization of discount  $8,934

To record the accrual of interest and amortization of discount.

3. The payment of interest on January 1, 2018:

Debit Interest payable $80,000

Credit Cash $80,000

4. Accrual of interest and amortization of thepremium on December 31, 2017:

Debit Interest expense $96,536

Credit Interst payable $80,000

Credit Amortization of discount  $16,536

Explanation:

a) Data and Calculations:

Face value of bonds = $1,600,000

Bonds price                  $1,482,239

Bonds discount                 $117,761

Coupon interest rate = 5%

Effective interest rate = 6%

Payment of interest = Annually on January 1

1. Issuance of bonds on January 1, 2017:

Cash $1,482,239

Bonds discount $117,761

10- year 5% Bonds payable $1,600,000

2. December 31, 2017:

Cash Payment = $80,000

Interest expense $88,934

Amortization of discount = $8,934

Fair value of bonds = $1,608,934

3. January 1, 2018:

Interest payable $88,934

Cash $80,000

Amortization of discount  $8,934

4. December 31, 2017:

Cash Payment = $80,000

Interest expense $96,536 (6% of $1,608,934)

Amortization of discount = $16,536

Fair value of bonds = $1,705,470

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