Question

Company Corp. issues $1,000,000, 9%, semiannual bonds on 1/1/Year 1. The bonds mature in 10 years and have an effective rate of 10%.

On 1/1/Year 2, Company Corp. retires the bonds at 110 plus accrued interest.

1. Prepare the journal entry for the issuance of the bonds
2. Prepare the entries for Year 1 related to the bond
3. Prepare the entry for the retirement of the bonds

Answer 1

1]	Price of the bonds = 1000000/1.05^20+45000*(1.05^20-1)/(0.05*1.05^20) =	$            937,689
	JOURNAL ENTRY FOR ISSUE OF BONDS:
1/1/Year 1	Cash	$            937,689
	Discount on bonds payable	$              62,311
	Bonds payable		$     1,000,000
	BOND AMORTIZATION SCHEDULE:
		Interest Paid	Interest expense	Discount amortized	Carrying value	Unamortized discount
	1/1/Year 1				$         937,689	$            62,311
	7/1/Year 1	$              45,000	$           46,884	$            1,884	$         939,573	$            60,427
	1/1Year 2	$              45,000	$           46,979	$            1,979	$         941,552	$            58,448
2]	JOURNAL ENTRIES FOR INTEREST IN YEAR 1:
7/1/Year 1	Interest expense	$              46,884
	Discount on bonds payable		$              1,884
	Cash		$ 45,000
12/31/Year 1	Interest expense	$              46,979
	Discount on bonds payable		$              1,979
	Interest payable		$ 45,000
3]	JOURNAL ENTRY FOR PAYMENT OF INTEREST AND RETIREMENT:
1/1/Year 2	Interest payable	$              45,000
	Cash		$ 45,000
	[To record payment of interest accrued]
1/1/Year 2	Bonds payable	$ 1,000,000
	Loss on retirement of bonds	$            158,448
	Discount on bonds payable		$           58,448
	Cash [1000000*110%]		$ 1,100,000
	[To record retirement of bonds]