Worthington Company issued $1,000,000 face value, six-year, 10% bonds on 7/1/201

Question

Worthington Company issued $1,000,000 face value, six-year, 10% bonds on 7/1/2012, when the market rate of interest was 12%. Interest payments are due every 7/1 and 1/1. Worthington uses a calendar year end.

Required

1. Prepare the journal entry to record the issuance of the bonds on 7/1/2012.
2. Prepare the adjusting journal entry on 12/31/2012, to accrue interest expense.
3. Prepare the journal entry to record the interest payment on 1/1/2013.
4. Calculate the amount of cash that will be paid for the retirement of the bonds on the maturity date.

Explanation / Answer

Using an online financial calculator, Future value: 1000000 Payment: 50000 (1M x 10% divided by two for the two payments) Number of periods: 12 (six years times two payment periods per year) Interest rate: 6% (12% divided by two for the two payment periods) Calculate PV (assuming payments occur at the end of the period, which is assumed since the problem doesn't tell you otherwise) PV: 916,161.56 1. So Db. Cash 916,161.56 Cr. Bonds Payable 916,161.56 2. Db. Interest Expense 54969.69 (916,161.56 x 6% interest per period) Cr. Interest Payable 50000 (For the payment to be paid) Cr. Bonds Payable 4969.69 3. Dr. Interest Payable 50000 Cr. Cash 50000 4. This is very easy, as you see in the previous answers, if you were to keep going every payment date you would be adding to the Bonds Payable account until it reached its face value, i.e. 1,000,000

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