Question

On July 1, 2002, Enjoy Toys Company issued $10 million in 10-year, 12% debenture bonds. Interest is payable semiannually on January 1 and July 1. Bond discounts and premiums are amortized by the straight-line method at each interest payment date and at year-end. The company’s fiscal year ends at December 31.
Required 1. July 1, 2002 to record the issuance of bonds at par value. 2. Make the necessary entries at December 31, 2002, under each of the following assumptions: (a)The bonds were issued at 97. (b)The bonds were issued on 102. *

Answer 1

1.

Date	General Journal	Debit	Credit
July 1, 2002	Cash	$10,000,000
	Bonds payable		$10,000,000
	( To record issuance of bonds at par)

2.

a.

Semi annual interest payment = Par value of bonds x Interest rate x 6/12

=10,000,000 x 12% x 6/12

= $600,000

Discount on bonds payable = Par value of bonds x 3%

= $300,000

Semi annual amortization of bond discount = Bond discount / Semi annual interest payment period

= 300,000/20

= $15,000

Date	General Journal	Debit	Credit
December 31, 2002	Interest expense	$615,000
	Discount on bonds payable		$15,000
	Interest payable		$600,000
	( To record interest expense)

b.

Premium on bonds payable = Par value of bonds x 2%

= 10,000,000 x 2%

= $20,000

Semi annual amortization of bonds premium = Bond premium / Semi annual interest payment period

= 20,000/20

= $10,000

Date	General Journal	Debit	Credit
December 31, 2002	Interest expense	$590,000
	Premium on bonds payable	$10,000
	Interest payable		$600,000
	( To record interest expense)