Question

Use the following information to answer the following three questions:

On July 1, 2003, Jones Corp. issued $100,000 face value, 10-year, 6% coupon bonds paying interest semiannually on June 30^th and Dec 31^st. The market (yield) rate on the date of issuance was 12%. The company’s fiscal year end is Dec. 31^st. The cash received on July 1, 2003 when the issuance occurred was $65,610.

1.      Which of the following journal entries were made when the bonds were issued on July 1^st, 2003?

a.    Dr-Cash $65,610; Dr Premium-B/P $34,390; Cr Bonds Payable $100k

b.   Dr-Cash $65,610; Dr Discount-B/P $34,390; Cr Bonds Payable $100k

c.    Dr-Cash $134,390; Credit Prem-B/P $34,390; Cr Bonds Payable $100k

d.   Dr-Bonds Payable $65,610; Dr Discount-B/P $34,390; Cr Cash $100k

2.      Which of the following journal entries were made to record the interest payment made on Dec. 31^st 2003?

a.    Dr Interest Exp $4,000; Dr Premium on B/P $2,000; Cr. Cash $6,000

b.   Dr Interest Exp $4,719; Cr Discount on B/P $1,719; Cr. Cash $3,000

c.    Dr Interest Exp $2,063; Dr Discount on B/P $937; Cr. Cash $3,000

d.   Dr Interest Exp $6,439; Cr Discount on B/P $3,439; Cr. Cash $3,000

3.      Which of the following journal entries would be made to record the retirement of the bonds at the end of the 10-year life, July 1^st 2012 (ignore the interest payment for the last semiannual period that would have been paid on June 30^th 2012)?

a.    Dr- Bonds Payable $95k; Dr- Premium on B/P $5k; Cr. Cash $100k

b.   Dr- Bonds Payable $100k; Cr. Cash $100k

c.    Dr- Bonds Payable $95k; Dr- Discount on B/P $5k; Cr. Cash $100k

d.   Dr- Cash $100k; Cr. Bonds Payable $100k

Answer 1

1.

Par value of bonds = $100,000

Cash receipts from issue of bonds = $65,610

Discount on bonds = Par value of bonds - Cash receipts from issue of bonds

= 100,000 - 65,610

= $34,390

Following journal entry entry will be made on July 1, 2003 to record issue of bonds :

Journal

Date	Account Title and Explanation	Debit	Credit
July 1	Cash	65,610
	Discount on bonds payable	34,390
	Bonds payable		100,000

Correct option is (b)

2.

Semiannual interest payment = Present value of bonds x Interest rate x 6/12

= 100,000 x 6% x 6/12

= $3,000

Semiannual amortization of bonds discount = Discount on bonds/20

= 34,390/20

= $1,719

Following journal entry entry will be made on Dec 31, 2003 to record interest expense:

Journal

Date	Account Title and Explanation	Debit	Credit
Dec 31	Interest expense	4,719
	Discount on bond payable		1,719
	Cash		3,000

Correct option is (B)

3.

Following journal entry entry will be made to record Retirement of bonds :

Journal

Date	Account Title and Explanation	Debit	Credit
	Bonds payable	100,000
	Cash		100,000

Correct option is (B)

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