Question

On January 1, 2017, Boston Enterprises issues bonds that have a $1,600,000 par value, mature in 20 years, and pay 8% interest semiannually on June 30 and December 31. The bonds are sold at par.

1. How much interest will Boston pay (in cash) to the bondholders every six months?

2. Prepare journal entries to record (a) the issuance of bonds on January 1, 2017; (b) the first interest payment on June 30, 2017; and (c) the second interest payment on December 31, 2017.

3. Prepare the journal entry for issuance assuming the bonds are issued at (a) 98 and (b) 102.

Answer 1

Solution

Boston Enterprises

1. Determination of the amount of interest that Boston would pay to the bondholders every six months:

Par value of bonds = $1,600,000

Interest rate = 8%

Semi-annual interest rate = 8% x ½ = 4%

Since the bonds are sold at par, the stated rate of interest equals the market rate of interest.
Hence, the entire interest expense is cash expense and involves no amortization of premium on bonds payable or discount on bonds payable.

Semi-annual interest expense = $1,600,000 x 4% = $64,000

2. Journal entries to record issuance of bonds, first interest payment and second interest payment:

Boston Enterprises
Journal Entries
Date	Account Titles and Explanation	Ref. No.	Debit	Credit
1-Jan-17	Cash		$1,600,000
	Bonds Payable			$1,600,000
	(To record issuance of bonds at par value)
30-Jun-17	Interest Expense		$64,000
	Cash			$64,000
	(to record payment of interest)
31-Dec-17	Interest Expense		$64,000
	Cash			$64,000
	(to record payment of interest)

3. Journal entries for issuance assuming,

1. Bond issue at 98 –

Boston Enterprises
Journal Entries
Date	Account Titles and Explanation	Ref. No.	Debit	Credit
1-Jan	Cash		$1,568,000
	Discount on Bonds Payable		$32,000
	Bonds Payable			$1,600,000
	(To record issuance of bonds at $98)

Bond issue price = $1,600,000 x 98% = $1,568,000

Discount on bonds payable = $1,600,000 - $1,568,000 = $32,000

2. Bond issue at $102 –

Boston Enterprises
Journal Entries
Date	Account Titles and Explanation	Ref. No.	Debit	Credit
Jan 1 17	Cash		$1,632,000
	Premium on Bonds Payable			$32,000
	Bonds Payable			$1,600,000
	(To record issuance of bonds at $102)

Bond issue price = $1,600,000 x 102% = $1,632,000

Premium on bond issue = $1,632,000 - $1,600,000 = $32,000