Question

On January 1, Boston Enterprises issues bonds that have a $1,300,000 par value, mature in 20 years, and pay 7% interest semiannually on June 30 and December 31. The bonds are sold at par.
 
1. How much interest will Boston pay (in cash) to the bondholders every six months?
2. Prepare journal entries to record (a) the issuance of bonds on January 1, (b) the first interest payment on June 30, and (c) the second interest payment on December 31.
3. Prepare the journal entry for issuance assuming the bonds are issued at (a) 96 and (b) 104

Answer 1

a. How much interest will Boston pay (in cash) to the bondholders every six months?
Semi-annual payment = $1,300,000 × 7% × 1/2

Payment =45,500

b.  Prepare journal entries to record (a) the issuance of bonds on January 1, (b) the first interest payment on June 30, and (c) the second interest payment on December 31.

1	January 01	Cash	1,300,000
		Bonds Payable		1,300,000
2	June 30	Bond interest expense	45,500
		Cash		45,500
3	December 31	Bond interest expense	45,500
		Cash		45,500

 

3. Prepare the journal entry for issuance assuming the bonds are issued at (a) 96 and (b) 104.

 

1	January 01	Cash	1,248,000
		Discount on bonds payable	52,000
		Bonds payable		1,300,000
2	January 01	Cash	1,352,000
		Premium on bonds payable		52,000
		Bonds payable		1,300,000

 

Discount of bonds payable = 1,300,000* (100%-96%)= 52,000

Premium on bonds payable = 1,300,000*(104%-100%) = 52,000

 

 

 

 

 

1. $45,500

Boston will pay interest of $45,5000  to the bondholders every six months.