Chapter 12: Q23E_1 (page 660)

Journalizing bond issuance and interest payments
On June 30, Daughtry Limited issues 8%, 20-year bonds payable with a face value of$130,000. The bonds are issued at 86 and pay interest on June 30 and December 31.
Requirements
1. Journalize the issuance of the bonds on June 30.
2. Journalize the semi-annual interest payment and amortization of bond discount on December 31.

Short Answer

Expert verified

The cash account and discount on bonds payable are debited with $111,800, and $18,200.The bonds payable account is credited with $130,000.
The interest expenses debited by $5,495. The discount on bonds payable and cash is credited by $295 and $5,200.

Step by step solution

Journal entry of the issue of bond

Date	Particulars	Debit	Credit
June 30	Cash	$111,800
	Discount on Bonds Payable	$18,200
	8% Bonds Payable		$130,000
	(To record the issue of the bond)

Calculation of cash received on issue of bond and interest expenses:

$\begin{matrix} Issue Price = Par Value \times \frac{$ 86}{100} \\ = $ 130, 000 \times \frac{$ 92}{100} \\ = $ 111, 800 \end{matrix}$

$\begin{matrix} Discount on Bonds Payable = Par Value - Issue Price \\ = $ 130, 000 - $ 111, 800 \\ = $ 18, 200 \end{matrix}$

Payment of interest and amortization of discount

Date	Particulars	Debit	Credit
December 31	Interest Expense	$5,495
	Discount on Bonds Payable		$295
	Cash		$5,200
	(To record the semi-annual payment and amortization of discount)

$\begin{matrix} Coupon Amount = Par Value \times Coupon Rate \times Time Period \\ = $ 130, 000 \times 8 % \times \frac{6}{12} \\ = $ 5, 200 \end{matrix}$

$\begin{matrix} Discount Amortize = \frac{Discounton Bonds Payable}{Semi-annualPeriod} \\ = \frac{$ 11, 800}{20 \times 2} \\ = $ 295 \end{matrix}$

$\begin{matrix} Interest Expenses = Discount On Bond Amortized + Coupon Amount \\ = $ 295 + $ 5, 200 \\ = $ 5, 495 \end{matrix}$

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Short Answer

Step by step solution

Journal entry of the issue of bond

Calculation of cash received on issue of bond and interest expenses:

Payment of interest and amortization of discount

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