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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Exercise Zero Coupon Bond

Johnson Company sold for $90.000 a $102,400, 2-year zero coupon bond on January 1, 2020. The bond matures on December 31, 2021.

Required:

  1. Prepare the entry to record the issuance of the bond.
  2. Prepare the adjusting entry to recognize 2020 interest expense.
  3. Prepare the entry to recognize the 2021 interest expense and the repayment of the bond on December 31, 2021.

To determine

(a)

Introduction:

A bond is long term liability wherein the issuer is entitled to pay the face value of the bond at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.

To record:

Journal entry for the issuance of bonds.

Explanation

Given:

$102,400zero coupon bonds were issued at $90,000 for 2 years.

The face value of bonds issued is recorded as bonds payable and any premium or discount on issue of bonds is recorded in separate “Premium on Bonds Payable” or “Discount on Bonds Payable” account whereas in case of issuance of bonds at par it is a regular journal entry where cash (asset) increased along with Bonds Payable (long term liability)...

To determine

(b)

Introduction:

A bond is long term liability wherein the issuer is entitled to pay the face value of the bond at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.

To record:

Adjusting Journal entry for interest expense for year 2020.

To determine

(c)

Introduction:

A bond is long term liability wherein the issuer is entitled to pay the face value of the bond at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.

To record:

Journal entry for interest expense for year 2021 and repayment of bond.

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