Question

Jay Organics Ltd. has a number of commercial greenhouse operations in Toronto. To finance the additional real estate and greenhouses necessary to meet the increasing demand for the company's products, the company decided to issue bonds. On January 1, it issued five-year, semi-annual bonds with a face value of $80 million. The contract rate on the bonds was 4.5% and the bonds were issued at 97.8 to yield 5%. Interest payments are to be made each June 30 and December 31.

a. Determine the proceeds on issuance of the bonds and prepare the journal entry to record the bonds' sale on January 1.

b. Provide the journal entries to record the first two interest payments.

c. What amount will be reported for the bond liability on the company's statement of financial position at December 31 of the first year?

Answer 1

• All working forms part of the answer
• Requirement ‘a’

Proceeds from Issuance = $ 80 million x 97.8% = $ 78.24 millions = $ 78,240,000

Journal entry for issuance:

Date	Accounts title	Debit	Credit
01-Jan	Cash	$ 78,240,000.00
	Discounts on Bonds Payable		$    1,760,000.00
	Bonds Payable		$ 80,000,000.00

• Requirement ‘b’

Date	Accounts title	Debit	Credit
30-Jun	Interest Expense [78240000 x 5% x 6/12]	$    1,956,000.00
	Discount on Bonds Payable		$        156,000.00
	Cash [ 80000000 x 4.5% x 6/12]		$    1,800,000.00
	(First Cash payment of interest)
31-Dec	Interest Expense [(78240000+1760000) x 5% x 6/12]	$    1,959,900.00
	Discount on Bonds Payable		$        159,900.00
	Cash [ 80000000 x 4.5% x 6/12]		$    1,800,000.00
	(First Cash payment of interest)

• Requirement ‘c’

Balance Sheet - Partial 31 Dec first year
Liabilities:
Bonds Payable	$    80,000,000.00
Less: Discounts on Bonds Payable	$      1,444,100.00
Carrying Value of Bonds Payable	$    78,555,900.00