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Chapter 14: Q6BE (page 753)

On January 1, 2017, JWS Corporation issued \(600,000 of 7% bonds, due in 10 years. The bonds were issued for \)559,224, and pay interest each July 1 and January 1. JWS uses the effective-interest method. Prepare the company’s journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry. Assume an effective-interest rate of 8%

Short Answer

Expert verified

The total for both the debit and credit sides is $644,792.68.

Step by step solution

01

Meaning of Coupon Bond

Bonds that pay periodic interest amount to the bondholder atequal frequency is coupon bond. Interest paid on bond at stated coupon rate.

02

Journal Entries

Date

Accounts and Explanation

Debit

Credit

January 1, 2017

Cash

$559,224

Discount on bonds payable

$40,776

Bonds Payable

$600,000

July 1, 2017

Interest expenses (559,224 x 8% x 1/2)

$22,368.96

Cash

$21,000.00

Discount on Bonds Payable

$1,368.96

December 31, 2017

Interest expenses

$22,423.72

Interest Payable

$21,000

Discount on Bonds Payable

$1,423.72

Working:

Discount on bonds payable on January 1= ($600,000-$559,224) = $40,776

Interest expenses on July 1 = ($559,224 x 8% x 1/12) = $22,368.96

Interest paid in cash paid on July 1= ($600,000 x 7% x 1/2) = $21,000.

Interest expenses on December 31 = {(559,224 +$1,368.96) x 8% x 1/2} = $22,423.72

Interest payable on December 31, 2017 = ($600,000 x 7% x 1/2) = $21,000

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Most popular questions from this chapter

On January 1, 2017, Aumont Company sold 12% bonds having a maturity value of \(500,000 for \)537,907.37, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2017, and mature January 1, 2022, with interest payable December 31 of each year. Aumont Company allocates interest and unamortized discount or premium on the effective-interest basis.

Instructions

(Round answers to the nearest cent.)

  1. Prepare the journal entry at the date of the bond issuance.
  2. Prepare a schedule of interest expense and bond amortization for 2017–2019.
  3. Prepare the journal entry to record the interest payment and the amortization for 2017.
  4. Prepare the journal entry to record the interest payment and the amortization for 2019.

McCormick Corporation issued a 4-year, \(40,000, 5% note to Greenbush Company on January 1, 2017, and received a computer that normally sells for \)31,495. The note requires annual interest payments each December 31. The market rate of interest for a note of similar risk is 12%. Prepare McCormick’s journal entries for (a) the January 1 issuance and (b) the December 31 interest.

(L01) Assume the bonds in BE14-2 were issued at 98. Prepare the journal entries for (a) January 1, (b) July 1, and (c) December 31. Assume The Colson Company records straight-line amortization semiannually.

Question: What are the general rules for measuring and recognizing gain or loss by both the debtor and the creditor in a troubled-debt restructuring involving a modification of terms?

On June 30, 2009, County Company issued 12% bonds with a par value of \(800,000 due in 20 years. They were issued at 98 and were callable at 104 at any date after June 30, 2017. Because of lower interest rates and a significant change in the company’s credit rating, it was decided to call the entire issue on June 30, 2018, and to issue new bonds. New 10% bonds were sold in the amount of \)1,000,000 at 102; they mature in 20 years. County Company uses straight-line amortization. Interest payment dates are December 31 and June 30.

Instructions

  1. Prepare journal entries to record the redemption of the old issue and the sale of the new issue on June 30, 2018.
  2. Prepare the entry required on December 31, 2018, to record the payment of the first 6 months’ interest and the amortization of premium on the bonds.
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