Question

The Vaughn Company issued $320,000 of 8% bonds on January 1, 2017. The bonds are due January 1, 2022, with interest payable each July 1 and January 1. The bonds are issued at face value.

Prepare Vaughn’s journal entries for (a) the January issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually. Round intermediate calculations to 6 decimal places, e.g. 1.251247 and final answer to 0 decimal places, e.g. 38,548.)

Answer 1

• All working forms part of the answer
• Bonds are issued at Face Value.
• Hence, Interest expense will be equal to Interest payment.
• 6 months’ Interest expense = Interest payment = $ 320,000 x 8% x (6months/12months) = $ 12,800
• Entries, as asked:

Date	Accounts title	Debit	Credit
(a) Jan 1, 2017	Cash	$          320,000.00
	Bonds Payable		$      320,000.00
	(Bonds issued at Face value - no discount, no premium)
(b) Jul 1, 2017	Interest Expense	$            12,800.00
	Cash		$         12,800.00
	(6 month interest paid)
(c ) Dec 31, 2017	Interest Expense	$            12,800.00
	Interest Payable		$         12,800.00
	(Interest accrued not paid, payable next day)