Question

On January 1, 2018, Twister Enterprises, a manufacturer of a variety of transportable spin rides, issues $540,000 of 7% bonds, due in 10 years, with interest payable semiannually on June 30 and December 31 each year.

if the market interest rate is 7%, the bonds will issue at $510,000. Record the bond issue on January 1, 2018, and the first two semiannual interest payments on June 30, 2018, and December 31, 2018. (If no entry is required for a transaction/event, select "No journal entry required" i

If the market interest rate is 8%, the bonds will issue at $503,306. Record the bond issue on January 1, 2018, and the first two semiannual interest payments on June 30, 2018, and December 31, 2018.

If the market interest rate is 6%, the bonds will issue at $580,169. Record the bond issue on January 1, 2018, and the first two semiannual interest payments on June 30, 2018, and December 31, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Hi Student,

The scenario here represents issuance of bond at face value, at discount and at premium at a particular rate of interest.

1)if the market interest rate is 7%, the bonds will issue at $510,000.

Ans-

On Jan 1, 2018, To record issue of bond at discount.

Cash A/c Dr. ------------------------------------ $510,000 (Cash)

Discount on Bonds Payable A/c Dr.--------- $ 30,000 ($540,000 Bonds- $ 510,000 cash)

      To Bonds Payable-------------------------- $ 540,000 (Total Bond amount)

Take the total amount of discount and divide by total number of interest payments to amortize the discount amount.

In this example, total discount amortization will be $30,000 discount amount/ 20 interest payments (10 years * 2 interest payments per year). So the entry to record the semi- annual interest payment and discount amortization would be:

Bond Interest Expense Dr. --------------------------------------- $20,400

             To Discount on Bonds payable ------------------------   $1,500
                  ($30,000/20 interest payments)

            To Cash ($ 540,000 * 7 %*1/2)------------------------------ $ 18,900
                  (1/2 represents semi- annually)


2) If the market interest rate is 8%, the bonds will issue at $503,306.

Ans-

On Jan 1, 2018, To record issue of bond at discount.

Cash A/c Dr. ------------------------------------ $ 503,306 (Cash)

Discount on Bonds Payable A/c Dr.--------- $ 36,694 ($540,000 Bonds- $ 503,306 cash)  
         To Bonds Payable-------------------------- $ 540,000 (Total Bond amount)

Take the total amount of discount and divide by total number of interest payments to amortize the discount amount.

In this example, total discount amortization will be $36,694 discount amount/ 20 interest payments (10 years * 2 interest payments per year). So the entry to record the semi- annual interest payment and discount amortization would be:

Bond Interest Expense Dr. --------------------------------------- $23,435

             To Discount on Bonds payable ------------------------ $1,835 (approx)
                   ($36,694 /20 interest payments)

            To Cash ($ 540,000 * 8%*1/2)------------------------------ $ 21,600
                   (1/2 represents semi- annually)

3) If the market interest rate is 6%, the bonds will issue at $580,169.

Ans-

Jan 1, 2018, To record issue of bond at premium.

Cash A/c Dr. ------------------------------------ $ 580,169 (Cash)

      To Bonds Payable-------------------------- $ 540,000 (Total Bond amount)

      To Premium on Bonds Payable----------- $ 40,169 (580,169 Cash - $540,000 bond)

Take the total amount of premium and divide by total number of interest payments to amortize the premium amount.

In this example, total premium amortization will be $40,169 premium amount/ 20 interest payments (10 years * 2 interest payments per year). So the entry to record the semi- annual interest payment and discount amortization would be:

Bond Interest Expense Dr. --------------------------------------- $14,192

Premium on Bonds payable Dr. --------------------------------- $2,008(approx)
($40,169 /20 interest payments)

           To Cash ($ 540,000 * 6%*1/2)---------------------------------$ 16,200
                (1/2 represents semi- annually)