On April 1 , 2002, Bob\'s Allen-wrench Company issues $ 1,000,000 of 7%, 10-year

Question

On April 1 , 2002, Bob's Allen-wrench Company issues $ 1,000,000 of 7%, 10-year bonds, with interest payments made each October I and April 1. The bonds are issued at 97. Bob's Allen-wrench Company amortizes any premium or discount using the straight-line method. a. Prepare the journal entry on April 1, 2002 to issue the bonds b. Prepare the journal entry on October 1,2002 to record the payment of interest and the amortization of any discount or premium. c. Prepare the journal entry on December 31, 2002 to record accrued interest and the amortization of any discount or premium

Explanation / Answer

Solution:

Part a – Journal entry to issue the bonds

We need to find out the issue price first.

Issued Price = Face Value x Bonds are issued at 97% = $1,000,000 x 97% = $970,000

Issue price is less than face value, it means the bonds are issued at discount.

Discount on Bonds Payable = 1000,000 – 970,000 = $30,000

Journal Entry

Date

Account Titles

Debit

Credit

Apr.1, 2002

Cash

$970,000

Discount on Bonds Payable

$30,000

Bonds Payable

$1,000,000

Part b ---

Discount on Bonds Payable = $30,000

It is amortized over the period of bonds using straight line method.

Semi Annual period to maturity = 10 years x 2 = 20

Coupon Rate = 7%

Semi Annual Coupon Interest = 1,000,000 * 7% * ½ = $35,000

Semi Annual Discount Amortization = Total Discount / Semi Annual period to maturity

= $30,000 / 20

= $1,500

Journal Entry on Oct 1, 2002

Date

Account Titles

Debit

Credit

Oct.1, 2002

Interest Expense

$36,500

Discount on Bonds Payable (Amortization)

$1,500

Cash Interest (1000,000*7%*1/2)

$35,000

Part c – Journal Entry on Dec 31, 2002

For this entry we need to calculate the amount for 3 months (From Oct to Dec)

Date

Account Titles

Debit

Credit

Dec .31, 2002

Interest Expense

$18,250

Discount on Bonds Payable (Amortization) (1500*3/6)

$750

Interest Payable (35,000*3/6)

$17,500

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Date

Account Titles

Debit

Credit

Apr.1, 2002

Cash

$970,000

Discount on Bonds Payable

$30,000

Bonds Payable

$1,000,000

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