(Recording bond issuance and interest) (Round dollar amounts to the nearest whol

Question

(Recording bond issuance and interest)   (Round dollar amounts to the nearest whole dollar. Assume no reversing entries are used)

On January 1, 2015, Boston Enterprises issues bonds that have a $3,400,000 par value, mature in 20 years, and pay 9% interest semiannually on June 30 and December 31. The bonds are sold at par.

1. How much interest will Boston pay (in cash) to the bondholders every six months?

2. Prepare a journal entries to record (a) the issuance of bonds on January 1, 2015; (b) the first interest payment on June 30, 2015; and (c) the second interest payment on December 31, 2015.

3. Prepare the journal entry for issuance assuming the bonds are issued at (a) 98 and (b) 102.

Explanation / Answer

1. Interest that is paid every six month:

3,400,000 x (9%/2) = $153,000

2. Journal Entries:

3. Journal Entry for issue of Bond at 98:

3,400,000 x 98% = $3,332,000

Discount = 3,400,000 - 3,332,000 = $68,000

Journal Entry for issue of Bond at 102:

3,400,000 x 102% = $3,468,000

Premium = 3,468,000 - 3,400,000 = $68,000

Date Account Title Debit Credit 1 Jan 15 Cash 3,400,000 9% Bonds Payable 3,400,000 June 30 15 Interest Expenses 153,000 Cash 153,000 Dec 31 2015 Interest Expenses 153,000 Cash 153,000

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