Question

Brief Exercise 14-7

On January 1, 2017, Indigo Corporation issued $620,000 of 9% bonds, due in 8 years. The bonds were issued for $656,123, and pay interest each July 1 and January 1. The effective-interest rate is 8%.

Prepare the company’s journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry. Indigo uses the effective-interest method. (Round intermediate calculations to 6 decimal places, e.g. 1.251247 and final answer to 0 decimal places, e.g. 38,548. 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.)

Accumulated Depreciation-Equipment Accumulated Depreciation-Machinery Allowance for Doubtful Accounts Bad Debt Expense Bond Issue Expense Bonds Payable Buildings Cash Common Stock Debt Investments Depreciation Expense Discount on Bonds Payable Discount on Notes Payable Discount on Notes Receivable Equipment Equity Investments Gain on Disposal of Machinery Gain on Disposal of Land Gain on Disposal of Plant Assets Gain on Redemption of Bonds Gain on Restructuring of Debt Gain on Sale of Machinery Interest Expense Interest Payable Interest Receivable Interest Revenue Land Loss on Disposal of Land Loss on Redemption of Bonds Machinery Mortgage Payable No Entry Notes Payable Notes Receivable Paid-in Capital in Excess of Par - Common Stock Paid-in Capital in Excess of Par - Preferred Stock Premium on Bonds Payable Sales Revenue Unamortized Bond Issue Costs Unearned Revenue Unearned Sales Revenue Unrealized Holding Gain or Loss - Income

Answer 1

(a) Bond issue on January 1,2017
Date	Account Title	Debit	Credit
1/1/2017	Cash	656123
	Bonds Payable		620000
	Bonds Premium		36123
	(Issue of bonds for cash)
(b) Interest payment on July 1 , 2017
Date	Account Title	Debit	Credit
7/1/2017	Interest Expense	26245
	Bonds Premium	1655
	Cash		27900
(c) Interest payment on December 31 , 2017
Date	Account Title	Debit	Credit
12/1/2017	Interest Expense	26179
	Bonds Premium	1721
	Cash		27900

Working:

A	B	C	D	E	F	G
Date	Interest	Interest	Amortization	Credit balance	Credit in	Book
	payment	Expense	of bond	in bonds	Bonds	Value of
			premium	premium a/c	Payable	the bonds
	4.5% of F	4% of G	C - B		A/c	F + E
1/1/2017				36123	620000	656123
7/1/2017	27900	26245	-1655	34468	620000	654468
12/1/2017	27900	26179	-1721	32747	620000	652747
7/1/2018	27900	26110	-1790	30957	620000	650957
12/1/2018	27900	26038	-1862	29095	620000	649095
7/1/2019	27900	25964	-1936	27159	620000	647159
12/1/2019	27900	25886	-2014	25145	620000	645145
7/1/2020	27900	25806	-2094	23051	620000	643051
12/1/2020	27900	25722	-2178	20873	620000	640873
7/1/2021	27900	25635	-2265	18608	620000	638608
12/1/2021	27900	25544	-2356	16252	620000	636252
7/1/2022	27900	25450	-2450	13802	620000	633802
12/1/2022	27900	25352	-2548	11254	620000	631254
7/1/2023	27900	25250	-2650	8604	620000	628604
12/1/2023	27900	25144	-2756	5848	620000	625848
1/1/2024	27900	25034	-2866	2982	620000	622982
12/1/2024	27900	24918	-2982	0	620000	620000

As the interest payment is semi-annual , the effective rate to be used will be 4%, and the coupon rate to be used is 4.5%.