Question

Pretzelmania, Inc., issues 5%, 20-year bonds with a face amount of $62,000 for $54,834 on January 1, 2018. The market interest rate for bonds of similar risk and maturity is 6%. Interest is paid semiannually on June 30 and December 31. 1. & 2. Record the bond issue and first interest payment on June 30, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Entry to record the issuance of bond

Account Titles and Explanation	Debit ($)	Credit ($)
Cash A/c	54,834
Discount on Bond Payable A/c	7,166
To Bond Payable A/c		62,000
[Entry to record the issuance of bond]

                                                                                             

Issue Price of Bond = $54,834

Face Value of Bond = $62,000

Therefore, Discount on Bond = $7,166 [$62,000 – 54,834]

Entry to record the first interest payment on June 30, 2018

Accounts Tittles and explanations	Debit ($)	Credit ($)
Interest Expenses A/c	1,645
To Discount on Bond Payable A/c		95
To Cash A/c		1,550
[Entry to record the first interest payment on June 30, 2018]

Total Interest Expense

= Carrying Value x Market Rate x ½

= $54,834 x 6% x ½

= $1,645

Cash Interest Paid

Cash Interest Paid = Face Value x Coupon Amount x ½

= $62,000 x 5% x ½

= $1,550

Discount on Bond Payable

Discount on Bond Payable = Total Interest Expense - Cash Interest paid

= $1,645 – 1,550

= $95