2. Entries for Issuing Bonds Austin Co. produces and distributes semiconductors

Question

2. Entries for Issuing Bonds
Austin Co. produces and distributes semiconductors for use by computer manufacturers. Austin Co. issued $15,000,000 of 12-year, 12% bonds on May 1 of the current year, with interest payable on May 1 and November 1. The fiscal year of the company is the calendar year.
MAY 1. Issued the bonds for cash at their face amount
Nov 1 Paid the interest on the bonds
Dec 31. Recorded accrued interest for two months.

Journalize the entries to record the above selected transactions for the current year.

Explanation / Answer

Solution

You don't say whether the bonds were sold at a premium or a discount, so I'm assuming they were sold at face value.

Austin Co. issued $15,000,000 of 12-year, 12% bonds on May 1 of the current year,
Dr Cash 15,000,000
Cr Bonds Payable 15,000,000

November 1
The interest is 12% per year and is paid twice per year.
(15,000,000 x 12%) / 2 = 900,000
Dr Interest Expense 900,000
Cr Cash 900,000

December 31
Two months of interest has accrued to the end of the year.
900,000 x 2/6 = 300,000
Dr Interest Expense 300,000
Cr Interest Payable 300,000

May 1
Four more months of interest has accrued.
900,000 x 4/6 = 600,000
Dr Interest Expense 600,000
Dr Interest Payable 300,000
Cr Cash 900,000

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