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

Hi,

Please find the answer as follows:

Part A:

Cash Dr. 562613

Discount on Bonds Payable Dr. 37387

Bonds Payable Cr. 600000

Part B:

July 1 2011

Bond Interest Expense (562613*.05) Dr. 28131

Discount on Bonds Payable Cr. 1131

Cash (600000*.09*.5) Cr. 27000

Part C:

Bond Interest Expense [(562613 + 1131)*.05] Dr. 28187

Discount on Bonds Payable Cr. 1187

Cash (600000*.09*.5) Cr. 27000

Thanks.

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