Question

Glover Industries received authorization on December 31, year 1, to issue $5,000,000 face value of 8%, 10-year bonds. The interest payment dates are June 30 and December 31. All the bonds were issued at par, plus accrued interest, April 1, Year 2. The bonds are callable by glover Industries at any time at 102.

1 Prepare the journal entry to record issuance of the bonds on April 1, Year 2.

2 Prepare the journal entry to record the first semiannual interest payment on the bonds at June 30, Year 2.

3 What is the amount of bond interest expense that appears in glover’s Year 2 income statement relating to these bonds?

4 What is the amount of accrued bond interest expense that appears in glover’s balance sheet at December 31, Year 2, with respect to these bonds?

Answer 1

Solution:

Part 1 and 2 – Journal Entry

Date	General Journal	Debit	Credit
April1, Year 2	Cash	$5,100,000
	Bonds Payable (par value)		$5,000,000
	Interest Payable (Par Value $5,000,000*8%*3/12)		$100,000
	(To record issuance of bonds plus accrued interest)
June 30, Year 2	Interest Payable	$100,000
	Interest Expense ($5,000,000*8%*1/2)	$200,000
	Cash		$300,000
	(To record first semi annual interest payment)

Part 3 –

The amount of bond interest expense that appears in glover’s Year 2 income statement relating to these bonds

Interest Expenes for 9 months (From April Year 2 to December Year 2) = Par Value $5,000,000 * Interest Rate 8% * 9 / 12

= $300,000

Amount of Bond Interest Expenses = $300,000

Part 4 - NIL

The amount of accrued bond interest expense that appears in glover’s balance sheet at December 31, Year 2, with respect to these bonds = 0 Nil

Since the interest payment date is December 31, so all the interest related to previous half yearly period paid on Dec 31.