Question

 

Question: Analyzing and journalizing bond transactions

On January 1, 2018, Educators Credit Union (ECU) issued 8%, 20-year bonds payable

with face value of $1,000,000. These bonds pay interest on June 30 and December 31.

The issue price of the bonds is 109.

Journalize the following bond transactions:

a. Issuance of the bonds on January 1, 2018.

b. Payment of interest and amortization on June 30, 2018.

c. Payment of interest and amortization on December 31, 2018.

d. Retirement of the bond at maturity on December 31, 2037, assuming the last

interest payment has already been recorded.

Answer 1

 

Step 1: Definition of bonds payable

A bond is a type of long-term debt that large companies issue to fulfill cash requirements.

Step 2: Entry for the issue of bonds payable

Date	Particulars	Debit	Credit
January 1, 2018	Cash	$1,090,000
	8% Bonds Payable		$1,000,000
	Premium on Bonds Payable		$90,000
	(Being entry for the issue of bonds)

 

Step 3: Entry for the issue of bonds payable

Date	Particulars	Debit	Credit
June 30, 2018	Interest Expense	$40,000
	Premium on bonds	$2,250
	Cash		$42,250
	(Being entry for the payment of interest)

 

Step 4: Entry for the issue of bonds payable

Date	Particulars	Debit	Credit
December 31, 2018	Interest Expense	$40,000
	Premium on bonds	$2,250
	Cash		$42,250
	(Being entry for the payment of interest)

 

Step 5: Entry for the issue of bonds payable

Date	Particulars	Debit	Credit
December 31, 2037	8% Bonds Payable	$1,000,000
	Cash		$1,000,000
	(Being entry for the retirement of bonds)

 

 

 

The 8% bonds payable account is debited with $1,000,000, and the cash account is credited with $1,000,000.