Question

On January 1, Boston Enterprises issues bonds that have a $1,300,000 par value, mature in 20 years, and pay 7% interest semiannually on June 30 and December 31. The bonds are sold at par.

1a. How much interest will Boston pay (in cash) to the bondholders every six months?
1b. Prepare journal entries to record (a) the issuance of bonds on January 1, (b) the first interest payment on June 30, and (c) the second interest payment on December 31.
1c. Prepare the journal entry for issuance assuming the bonds are issued at (a) 96 and (b) 104.

1a.

par (maturity) value		semiannual rate		semiannual cash interest payment
	x		=

1b.

date	general journal	debit	credit
jan 01
June 30
dec 31

1c.

date	general journal	debit	credit
jan 01

Answer 1

1a)

semiannual cash interest payment = Par value of bonds x semiannual rate

= 1,300,000 x 3.5%

= $45,500

1b)

Journal

Jan. 1	Cash	1,300,000
	Bonds payable		1,300,000
June 30	Interest expense	45,500
	Cash		45,500
Dec. 31	Interest expense	45,500
	Cash		45,500

1c)

a)

Par value of bonds = $1,300,000

Issue price = 96

Cash receipts from issue of bonds = 1,300,000 x 96%

= $1,248,000

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

= 1,300,000 - 1,248,000

= $52,000

Journal

Jan.1	Cash	1,248,000
	Discount on bonds payable	52,000
	Bonds payable		1,300,000

b)

Par value of bonds = $1,300,000

Issue price = 104

Cash receipts from issue of bonds = 1,300,000 x 104%

= $1,352,000

Premium on bonds payable = Cash receipts from issue of bonds - Par value of bonds

= 1,352,000 - 1,300,000

= $52,000

Journal

Date	Account title	Debit	Credit
Jan. 1	Cash	1,352,000
	Bonds payable		1,300,000
	Premium on bonds payable		52,000
	(To record issue of bonds at premium)