This problem is worth 15 points. On July 1, 2016 Alpha Company sells $1,000,000

Question

This problem is worth 15 points. On July 1, 2016 Alpha Company sells $1,000,000 face value of 10% five year bonds which call for semiannual interest payments. The bonds are dated April 1, 2016 so these bonds are issued between interest dates. The market rate at the date of issue is also 10%. For simplicity, use a 360-day year and 3 day months for all calculations.

Record the journal entries for the issuance of the bonds

Record the journal entries for the first interest payment due on October 1, 2016. Assume that interest has not been accrued at each month end.

Explanation / Answer

Answer: Journal entry for the issuance of the bonds:

Cash A/C Dr. $1000000

To Bonds Payable A/C $1000000

Journal entry for interest:

Interest expense A/C Dr. $25000

To interest payable A/C $25000

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