A company sold $4,000,000 of 5%, 10-year bonds on January 1, 2018 when the yield

Question

A company sold $4,000,000 of 5%, 10-year bonds on January 1, 2018 when the yield (market) rate of interest was 6%. The bonds were sold for $3,702,450. The bonds pay interest on June 30 and December 31 each year.

Required:

a. Prepare the journal entry to record the issuance of the bonds on January 1, 2018.

b. Using the effective interest method prepare the journal entries to record the transactions on June 30 and December 31, 2018. Round your answers to the nearest dollar.

Please show all work with explanations.

Explanation / Answer

SOLUTION

Amortization schedule-

Date Account titles and Explanation Debit ($) Credit ($) January 1, 2018 Cash 3,702,450 Discount on bonds payable 297,550 Bonds payable 4,000,000 (To record issuance of bonds) June 30,2018 Interest expense 111,074 Interest payable 100,000 Discount on bonds payable 11,074 (To record the interest payable on June) Dec.31 2018 Interest expense 111,406 Interest payable 100,000 Discount on bonds payable 11,406 (To record the interest payable on Dec.)

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