On January 1, 2014, Floppy Co. issued 4% bonds with a face value of $400,000 whe

Question

On January 1, 2014, Floppy Co. issued 4% bonds with a face value of $400,000 when the market interest rate was 6%. The bonds are due in ten years, and interest is payable every Januarey 1 and June 30. Floppy does not elect the fair value option for reporting its financial liabilities. Do not provide any journal explanations. If no entry is necessary, write "no entry." Round all numbers to the nearest dollar.

Required:

a. Prepare the journal entries for the bond issue on January 1, 2014.

b. Prepare the journal entry for the interest payment on June 30, 2016.

c. Prepare any required end of 2016 adjusting entry.

Explanation / Answer

(a)

2014

jan.1      Cash A/c Dr.                        4,00,000

                 To 6% Bond Payable A/c                 4,00,000

( Being the Bond issued and cash received)

(b)

2016

June.30        Interest Expense A/c Dr. 12,000

                      To Cash A/c                           12,000

               (Being the 6 month Interest paid, 4,00,000 x 6/100 x 6/12 = 12,000)

( c)

Dec.31 Interest Expense A/c Dr.        12,000

             To Interest Payable A/c                   12,000

          (Being the six month interest due)

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