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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Bryan Company issued $500,000 of 10% face value bonds on January 1, 2019, for $486,000. The bonds are due December 31, 2021, and pay interest semiannually on June 30 and December 31. Bryan uses the straight-line amortization method.

Required:

Prepare the journal entries to record the issuance of the bonds and the first two interest payments.

To determine

Prepare journal entry to record issuance of bonds, and to record first two periods’ interest expenses.

Explanation

Bonds:

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

Prepare journal entry to record issuance of bonds.

DateAccount titles and ExplanationDebitCredit
January 1, 2019Cash$486,000  
 Discount on bonds payable (balancing figure)$14,000  
      Bonds payable $500,000
 (To record issuance of bonds)  

Table (1)

  • Cash is a current asset, and it is increased. Therefore, debit cash account for $486,000.
  • Discount on bonds payable is a contra liability, and it is increased. Therefore, debit discount on bonds payable account for $14,000.
  • Bonds payable is a liability, and it is increased. Therefore, credit bonds payable account for $500,000.

Prepare journal entry to record first interest payments.

DateAccount titles and ExplanationDebitCredit
June 30, 2019Interest expense (balancing figure)$27,333.33  
      Discount on bonds payable (1) $2,333.33
       Cash (2) $25,000.00
 (To record payment of interest expense)  

Table (2)

  • Interest expense is a component of stockholders’ equity, and it increases expense account. Therefore, debit interest expense account for $27,333.33.
  • Discount on bonds payable is a contra liability, and it is decreased. Therefore, credit discount on bonds payable account for $2,333.33.
  • Cash is a current asset, and it is decreased. Therefore, credit cash account for $25,000.

Working notes:

(1) Calculate discount on bonds payable.

Discount on bonds payable =Total discount on bondsNumber of life for bonds=$14,0003years×2=$23,0006periods=$2,333.33

(2) Calculate cash proceeds.

Cash =Face value of bonds×Contract interest rate×Time period=$500,000×10%×612=$25,000

Prepare journal entry to record second interest payments

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