Question

On October 1, 2016, Indigo Corp. issued $960,000, 5%, 10-year bonds at face value. The bonds were dated October 1, 2016, and pay interest annually on October 1. Financial statements are prepared annually on December 31.

Prepare the journal entry to record the issuance of the bonds.

Prepare the adjusting entry to record the accrual of interest on December 31, 2016.

Show the balance sheet presentation of bonds payable and bond interest payable on December 31, 2016.

Prepare the journal entry to record the payment of interest on October 1, 2017.

Prepare the adjusting entry to record the accrual of interest on December 31, 2017.

Assume that on January 1, 2018, Indigo pays the accrued bond interest and calls the bonds. The call price is 104. Record the payment of interest and redemption of the bonds.

Answer 1

Solution 1:

Indigo Corp.
Journal Entries
Date	Particulars	Debit	Credit
1-Oct-16	Cash Dr	$960,000.00
	To Bond Payable		$960,000.00
	(To record issue of bonds)
31-Dec-16	Interest expense Dr ($960,000*5%*3/12)	$12,000.00
	To Interest Payable		$12,000.00
	(To record interest accrued)

Solution 2:

Indigo Corp.
Balance Sheet (Partial) As on Dec 31, 2016
Particulars	Amount
Current Liabilities:
Interest Payable	$12,000.00
Long term liabilties:
Bond Payable	$960,000.00

Solution 3:

Indigo Corp.
Journal Entries
Date	Particulars	Debit	Credit
1-Oct-17	Interest expense Dr	$36,000.00
	Interest Payable Dr	$12,000.00
	To Cash		$48,000.00
	(To record payment of interest)
31-Dec-17	Interest expense Dr ($960,000*5%*3/12)	$12,000.00
	To Interest Payable		$12,000.00
	(To record interest accrued)
1-Jan-18	Interest Payable Dr	$12,000.00
	To Cash		$12,000.00
	(To record payment of interest)
1-Jan-18	Bond Payable Dr	$960,000.00
	Loss on redemption of bond Dr	$38,400.00
	To Cash ($960,000*104%)		$998,400.00
	(To record bond retirement)