MC issued $5million of 20-year, 9.5 percent bonds on July 1, 2018, at 98. Interest is due on June 30 and December 31 of each year, and all the bonds in the issue mature on June 30, 2018. MC’s fiscal year ends on December 31. Prepare the following journal entries.-July 1, 2018 to record the issuance of the bonds-December 1, 2018, to pay interest and amortize the bond discount.-June 30, 2018, to pay interest, amortize bonds discount and retire the bonds at maturity (make two separate entries).-Briefly could explain the effect of amortizing the bond discount upon (1) annual net income and (2) annual net cash flow from operating activities. (Ignore possible income tax effects).

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Asked Jul 26, 2019
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MC issued $5million of 20-year, 9.5 percent bonds on July 1, 2018, at 98. Interest is due on June 30 and December 31 of each year, and all the bonds in the issue mature on June 30, 2018. MC’s fiscal year ends on December 31. Prepare the following journal entries.

-July 1, 2018 to record the issuance of the bonds

-December 1, 2018, to pay interest and amortize the bond discount.

-June 30, 2018, to pay interest, amortize bonds discount and retire the bonds at maturity (make two separate entries).

-Briefly could explain the effect of amortizing the bond discount upon (1) annual net income and (2) annual net cash flow from operating activities. (Ignore possible income tax effects).

 

 

 

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Expert Answer

Step 1

Journal entry: Journal entry is book of original entry used to record the economic event and transactions that affect the accounts of a company. The journal lists transactions in chronological sequence by data. All business transactions are initially recorded in a journal using the double method of bookkeeping.

Step 2

Prepare journal entry for the issuance of bonds payable on July 1, 2018.

 

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Post Debit (S) Credit ($) Account Title and Explanation Date Ref 4,900,000 2018 Cash Discount on Bonds Payable 100,000 July 1 Bonds Payable 5,000,000 (To record issuance of bonds payable at discount)

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Step 3

Working notes for the above given...

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Face value of bonds Discount on bonds payable -Face value of bonds - Discounted price X 98 S5,000, 000-S5,000,000 x, 100 =S5,000, 000-S4,900,000 =$100, 000 Face value of bonds Cash x Discounted price 98 -$5,000,000 x 100 =S4,900, 000

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