Question

Resto Corporation has authorized to issue$5,000,000 of its 8%, 5-year bonds On January 1, 2019, the bonds issued at 28/02/2019 plus accrued interest when the effective interest rate10%. The bonds interest is quartile onApril1, July 1, October1, and January 1. On July 1, 2020 after paid interest Resto purchased 40% of its issued bonds on the open market at $1,500,000 and cancelled them. Resto uses the effective interest rate method for amortization of bond premiums and discounts. Required: 1- Journalize the bonds issued on February 28, 2019? 2- Journalize all interest entries during 2019? 4- Journalize the entry for redemptions of bonds on July1, 2020and entries at 31, December 2020

Answer 1

1) Journal Entry for Bonds Issued on February 28 2019

By Cash/Bank Account Debit                   5,000,0000

By Bond Interest Expense Debit        33333.33

         To Bonds Payable Credit                        5,000,000                        

          To Bond Interest Expense Payable Credit           33333.33

(Being Bond Issue as Face Value and Interest for 2 month is Accrued at Bond Interest Rate of 8% for 1 months till March as next interest payment date is 1st of April)

2) Journal Entry for Interest being Paid on April,July, October 2019 , & January 2020

April 2019 :-   By Bond Interest Expense Payable Debit 33,333.33

                      To Cash/Bank Account Credit                    33,3333.33

(Being Accrued Interest Paid on 1st April 2019)

July 2019 :-   By Bond Interest Expense Debit                         1,00,000

                      To Cash/Bank Account Credit                             1,00,000

                      To

(Being Interest paid for 3 Months from Arpil to June 2019 at 8% Bond Interest Rate)

October 2019 :-   By Bond Interest Expense Debit                        1,00,000

                      To Cash/Bank Account Credit                            1,00,000

(Being Interest paid for 3 Months from July to September 2019 at 8% Bond Interest Rate)

31st December 2019 :-   By Bond Interest Expense Debit             1,00,000

                                        To Bond Interest Expense Payable Credit               1,00,000

(Being December end of reporting - Interest is accrued)

January 2020 :-   By Bond Interest Expense Payable Debit                        1,00,000

                              To Cash/Bank Account Credit                           1,00,000

(Being Interest paid for 3 Months from October to December 2019 at 8% is paid on January 2020)

4) Journal Entry for Redemption of Bonds on July 1, 2020 and cancelled then in 31st December 2020.

1st July 2020     By Bond Purcahsed               1,500,000

                          To Cash/Bank Account Credit       1,500,000

(Being Bond Purchased from Open Market, which comprises of 40%)

31st December 2020   By Bond Payable                  2,000,000

                                    To Bond Purchased             1,500,000

                                    To Discount on Bond Payable   5,00,000

(Being Bond Redeem at discount)