Question

On January 1, Boston Enterprises issues bonds that have a $1,650,000 par value, mature in 20 years, and pay 10% interest semiannually on June 30 and December 31. The bonds are sold at par.

1. How much interest will Boston pay (in cash) to the bondholders every six months?
2. 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.
3. Prepare the journal entry for issuance assuming the bonds are issued at (a) 95 and (b) 105.

Answer 1

Assumption: Wherever required, the face value per bond is assumed to be $ 100

1. Interest for every 6 months = Par Value of the Bond x interest rate per annum x 1/2

= 1,650,000 x 10% x 1/2

= $ 82,500

2.

Date	Particulars	Debit ($)	Credit ($)
1st Jan	Bank A/c	1,650,000
	To Bonds (Liability)		1,650,000
	(Being Bonds Issued)
30th June	Interest Expense A/c	82,500
	To Bank		82,500
	(Being Interest Paid)
31st Dec	Interest Expense A/c	82,500
	To Bank		82,500
	(Being Interest Paid)

3.

(a) If Bonds are issued at $ 95

Total Issue Proceeds = 95 x 16,500 = $ 1,567,500

Discount on Issue = 5 x 16,500 = $ 82,500

Date	Particulars	Debit ($)	Credit ($)
1st Jan	Bank A/c	1,567,500
	Discount on Issue of Bonds	82,500
	To Bonds (Liability)		1,650,000
	(Being Bonds Issued)

(b) If Bonds are issued at $ 105

Total Issue Proceeds = 105 x 16,500 = $ 1,732,500

Premium on Issue = 5 x 16,500 = $ 82,500

Date	Particulars	Debit ($)	Credit ($)
1st Jan	Bank A/c	1,732,500
	Premium on Issue of Bonds		82,500
	To Bonds (Liability)		1,650,000
	(Being Bonds Issued)