Question

Hello, I'm having a hard time solving these problems because I have no idea on what to do with accrued interest. Help is highly appreciated!

On March 1, 2015, Bowan Corporation issued 6% bonds dated February 1, 2015, the face amount of $700,000. The bonds were sold for the present value of the bonds on March 1, 2015 plus one-month accrued interest. The bonds mature on January 31, 2018. Interest is paid semiannually on July 31 and January 31. Bowan's fiscal year ends on December 31 each year. The effective interest rate is 8%. Show calculations.

   a. Determine the present value the bonds on March 1, 2015 and the amount of accrued interest that was included in the proceeds received from the bond sale.

        b. Prepare the journal entry for the issuance of the bonds on March 1, 2015.

        c. Prepare the journal entry for the interest payment on July 31, 2015.

Answer 1

		Cash flow	PVIF@4%	Present Value	Debit Interest expense	Amortization of discount	Balance in Bonds discount	Bonds Face value	Bonds carrying value
							40194.96	700000	659805
March 1, 2015		-3500	1	-3500		0	36694.96	700000	663305
July 31, 2015		21000	0.961538	20192.31	26532.2	5532.202	31162.76	700000	668837.2
January 31, 2016		21000	0.924556	19415.68	26753.49	5753.49	25409.27	700000	674590.7
July 31, 2016		21000	0.888996	18668.92	26983.63	5983.629	19425.64	700000	680574.4
January 31, 2017		21000	0.854804	17950.89	27222.97	6222.975	13202.66	700000	686797.3
July 31, 2017		21000	0.821927	17260.47	27471.89	6471.893	6730.769	700000	693269.2
January 31, 2018		21000	0.790315	16596.61	27730.77	6730.769	0	700000	700000
January 31, 2018		700000	0.790315	553220.2				700000	700000
Present Value of Bonds			=	659805
Plus one month's accrued Interest				3500
Sale proceeds of bonds				663305

	Date/S.N.	Account title & Explanation		Debit	Credit
				Amount in $	Amount in $
	March 1, 2015	Cash		663305
			Bonds Payable		659805
			Accrued Interest		3500
		To record the issuance of bonds together with accrued interest
	July 31, 2015	Accrued Interest		3500
		Interest expense		23032
			Cash		21000
			Discount on Bonds		5532
		To record interest expense for the period

Note : The above journal entry for interest payment has been passed using effect interest method.