Hrabik Corporation issued $600,000, 9%, 10-year bonds on January 1, 2011, for $5

Question

Hrabik Corporation issued $600,000, 9%, 10-year bonds on January 1, 2011, for
$562,613.This price resulted in an effective-interest rate of 10% on the bonds. Interest is payable
semiannually on July 1 and January 1. Hrabik uses the effective-interest method to amortize
bond premium or discount.
Instructions
Prepare the journal entries to record the following. (Round to the nearest dollar.)
(a) The issuance of the bonds.
(b) The payment of interest and the discount amortization on July 1, 2011, assuming that interest
was not accrued on June 30.
(c) The accrual of interest and the discount amortization on December 31, 2011.

Explanation / Answer

a) The issuance of the bonds Jan. 1 Dr Cash $562,613 Dr Bonds discount $37,387 Cr Bonds payable $600,000 b) The payment of interest and the discount amortization on July 1, 2011, assuming that interest was not accrued on June 30. Dr Bonds interest expense $28,131 [($562,613 x 10%)/2] Cr Cash $27,000 ($600,000 x 9% x 6/12) Cr Bonds discount (amortization) $1,131 c)The accrual of interest and the discount amortization on December 31, 2011. Dr Bonds interest expense $28,187 Cr Bonds interest payable $27,000 Cr Bonds discount (amortization) $1,187

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