Question

The Sage Company issued $300,000 of 13% bonds on January 1, 2017. The bonds are due January 1, 2022, with interest payable each July 1 and January 1. The bonds were issued at 97.

Prepare the journal entries for (a) January 1, (b) July 1, and (c) December 31. Assume The Sage Company records straight-line amortization semiannually.

Answer 1

note: cash received on issue of bonds = face value * issue price %

=>$300,000 * 97%

=>$291,000.

straight line amortization per six month period = discount / number of periods

=> ($300,000 - 291,000) / 10 periods..........(5 years between 2017 to jan 1 2022 will have 10 semi annual periods)

=>$9000 / 10

=>$900.per period.

interest paid in cash per six month period = face value * interest rate * 6/12

=>$300,000*13% * 6/12

=>$19,500.

interest expense per period = cash paid + discount amortized per period

=> 19,500 + 900 =>20,400

the following are the required journal entries:

date	acccounts	debit	credit
jan 1	cash a/c	$291,000
	discount on bonds payable a/c	9,000
	...............To bonds payable a/c		300,000
july 1	Interest expense	20,400
	.............To Discount on bonds payable a.c		900
	..............To Cash a/c	..	19,500
December 31	Interest expense a/c	20,400
	..................To discount on bonds payable a/c		900
	..................To interest payable a/c		19,500