Question

 

Bond interest and discount amortization. BU Curriculum Corporation issued $900,000 of 7% bonds on August 1, 2019, due on August 1, 2024. The interest is to be paid twice a year on February 1 and August 1. The bonds were sold to yield 9% effective annual interest. BU Curriculum Corporation closes its books annually on December 31. (b) Prepare the journal entries for the following: 1. August 1, 2019 bond issue 2. Adjusting entry for December 31, 2019 (adjusting entry should cover 5 months) 3. February 1, 2020 entry 4. August 1, 2020 entry 5. Adjusting entry from December 31, 2020   (c) Compute the interest expense to be reported in the income statement for the year         ended December 31, 2019 and December 31, 2020. (d)Complete an amortization schedule for the above bond (for all periods) using the straight-line amortization method (entries are not required).

Answer 1

Answer (b)

In the books of BU Curriculum Corporation
Journal Entries
Date	Account Titles and Explanation	Debit ($)	Credit ($)
2019
Aug 1	Bank A/C                                                                 DR.	900,000
	To Bonds Payable A/C		900,000
	(Being 7% bonds issued )
Dec 31	Interest Expenses A/C                                             DR. ($ 900,000 x 7% x 5/12)	26,250
	To Interest Payable A/C		26,250
	(Being interest on bonds till reporting date recorded)
2020
Feb 1	Interest Expenses A/C                                            DR. ($ 900,000 x 7% x 1/12)	5,250
	Interest Payable A/C                                               DR.	26,250
	To Cash A/C		31,500
	(Being Interest on bonds paid)
Aug 1	Interest Expenses A/C                                             DR. ($ 900,000 x 7% x 6/12)	31,500
	To Cash A/C		31,500
	(Being interest on bonds paid)
Dec 31	Interest Expenses A/C                                             DR. ($ 900,000 x 7% x 5/12)	26,250
	To Interest Payable A/C		26,250
	(Being interest on bonds till reporting date recorded)

Answer (c)

Computation of the interest expense to be reported in the income statement for the year ended December 31, 2019 and December 31, 2020.

Particulars	Calculation	Amount ($)
Interest expense for the year ended December 31, 2019	$ 900,000 x 7% x 5/12	26,250
Interest expense for the year ended December 31, 2020	$ 900,000 x 7%	63,000