Question

 

Question: Journalizing bond transactions

Anderson Company issued $70,000 of 10-year, 9% bonds payable on January 1, 2018.

Anderson Company pays interest each January 1 and July 1 and amortizes discount or

premium by the straight-line amortization method. The company can issue its bonds

payable under various conditions.

Requirements

1. Journalize Anderson Company’s issuance of the bonds and first semiannual

interest payment assuming the bonds were issued at face value. Explanations are

not required.

2. Journalize Anderson Company’s issuance of the bonds and first semiannual

interest payment assuming the bonds were issued at 92. Explanations are not

required.

3. Journalize Anderson Company’s issuance of the bonds and first semiannual

interest payment assuming the bonds were issued at 103. Explanations are not

required.

4. Which bond price results in the most interest expense for Anderson Company?

Explain in detail

Answer 1

 

Step 2: Journal entry for the issue of bonds and payment of interest

Date	Particulars	Debit	Credit
January 1, 2018	Cash	$70,000
	Bonds Payable		$70,000
	(Being entry to record the issue of bond)
July 1, 2018	Interest Expense	$3,150
	Cash		$3,150
	(Entry for the payment of interest)

 

Step 3: Journal entry for the issue of bonds and payment of interest

Date	Particulars	Debit	Credit
January 1, 2018	Cash	$64, 400
	Discount on Bonds Payable	$5,600
	Bonds Payable		$70,000
	(Being entry to record the issue of bond)
July 1, 2018	Interest Expense	$3,430
	Discount on Bonds Payable		$280
	Cash		$3,150
	(Entry for the payment of interest)

 

Step 4: Journal entry for the issue of bonds and payment of interest

Date	Particulars	Debit	Credit
January 1, 2018	Cash	$72,100
	Premium on Bonds Payable		$2,100
	Bonds Payable		$70,000
	(Being entry to record the issue of bond)
July 1, 2018	Interest Expense	$3,045
	Discount on Bonds Payable	$105
	Cash		$3,150
	(Entry for the payment of interest)

 

Step 5: Most interest expense

When the bonds are issued at discount it results the most interest expense for Anderson company. The interest expense on bond issue at discount is $3,430.

 

 

 

When the interest rate on the bond issue at discount is less than the market interest rate then these bonds are known as bond issued at discount.