Fox Corporation issued 8%, $560,000, 10-year bonds for $534,000 on June 30, 2016

Question

Fox Corporation issued 8%, $560,000, 10-year bonds for $534,000 on June 30, 2016. Debt issue costs were $3,100. Interest is paid semiannually on December 31 and June 30. One year from the issue date (July 1, 2017), the corporation exercised its call privilege and retired the bonds for $540,000. The corporation uses the straight-line method both to determine interest expense and to amortize debt issue costs.

Required:

1.   Prepare the journal entry to record the issuance of the bonds.

2.   Prepare the journal entries to record the payment of interest and amortization of debt issue costs on December 31, 2016.

3.   Prepare the journal entries to record the payment of interest and amortization of debt issue costs on June 30, 2017.

4.   Prepare the journal entry to record the call of the bonds.

Explanation / Answer

1. On june 30, 2016

Journal Entry to record the issuance of the bonds

Journal entry to record Debt issue costs

2. On 31st Dec, 2016

Journal entriy to record the payment of interest and amortization of debt issue costs

Face value of Bond = $560,000
Interest Rate P.A = 8%
Interest payment = ($560000 x 8%) / 2 = $22400
Discounts on bonds payable = $26000
Total number of interest payment = 10 year x 2 = 20 times
Amortised Discount on Bonds payble = $26000/20 = $1300
Bond Interest Expenses = ($22400 + $1300) = $23700

Debt issue expenses = Debt Issue Costs / Total number of interest payment = $3100 / 20 = $155

3. On 30 June 2017

Journal entries to record the payment of interest and amortization of debt issue costs

[See part 2 for working details]

4. On 1 July, 2017

Journal entry to record the call of the bonds

Unamortise Debt issue costs = ($3100 / 10) x 9 = $2790
Unamortise Discount on Bonds payble = ($26000 / 10) x 9 = $23400

Particulars Debit Credit Cash $534000 Discounts on bonds payable $26000 Bonds Payable $560000

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