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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Entries for issuing bonds

Thomson Co. products and distributes semiconductors for use by computer manufacturers. Thomson Co. issued $900,000 of 10-year, 7% bonds on May 1 of the current year at face value, with interest payable on May 1 and November 1. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions for the current year:

May 1. Issued the bonds for cash at their face amount.

Nov.1. Paid the interest on the bonds.

Dec.31. Recorded accrued interest for two months.

To determine

Bonds: Bonds are long-term promissory notes that are represented by a company while borrowing money from investors to raise fund for financing the operations.

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

To prepare:

  • Journal entry to record issuance of the bonds for cash at face amount.
  • Journal entry to record the payment of interest on the bonds on November 1.
  • Journal entry to record accrued interest for two months.
Explanation

Prepare journal entry for issuance of bonds at face amount on May 1.

Date Accounts and Explanation Post Ref Debit ($) Credit ($)
May 1 Cash 900,000
Bonds Payable 900,000
(To record the issuance of bonds payable at face value)

Table (1)

  • Cash is an asset and it is increased. So, debit it by $900,000.
  • Bonds payable is a liability and it is increased. So, credit it by $900,000.

Prepare journal entry for interest payment on November 1.

Date Accounts and Explanation Post Ref Debit ($) Credit ($)
November 1 Interest Expense 31,500
Cash 31,500
(To record the payment of semiannual interest)

Table (2)

Working note:

Interest expense = Bonds payable×interest rate×Time periods                          = $900,000×7%×612                          = $31,500

  • Interest expense is an expense and it decreases the equity value

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