Question

Can-Ed University, which is owned by a group of Canadian universities and colleges, issued bonds to finance the construction of an overseas campus in China. Can-Ed issued 6% 20-year bonds with a face value of $110,000,000. The bonds will pay interest semi-annually.

i.	6% (issued at par)
ii.	6.5% (issued at 94.448)
	iii.5.5% (issued at 106.02) Prepare the journal entry Can-Ed would record at the time of the issuance of the bonds under each of the alternative yields. Also prepare the journal entries to record the interest expense for the first two periods under each alternative

Answer 1

JOURNAL ENTRIES
Accounts title and explanations					Debit $	Credit $
Case-1
For issue
Cash Account Dr.					110,000,000
6% Bonds payable						110,000,000
Interest payments:
Interest on Bonds payable Dr.			(110,000,000*6%/2)		3,300,000
Cash Account						3,300,000
Interest on Bonds payable Dr.					3,300,000
Cash Account						3,300,000
Case-2
For Issue
Cash Account Dr.					103892800
Discount on Bonds payable (1100000*5.552)					6107200
6% bonds payable						110,000,000
Interest payments:
Interest on bonds payable Dr.					3452680
Cash Account (110,000,000*6%/2)						3300000
Discount on bonds payable (610,7200/40)						152680
Interest on bonds payable Dr.					3452680
Cash Account (110,000,000*6%/2)						3300000
Discount on bonds payable (610,7200/40)						152680
Note: In the absence of information, Straight line amortization method is followed.
Case-3
For Issue
Cash Account Dr.					116622000
6% bonds payable						110000000
Premium on bonds payable						6,622,000
Interest payments:
Interest on bonds payable Dr.					3,134,450
Premium on bonds payble (6622000/40)					165550
Cash Account						3,300,000
Interest on bonds payable Dr.					3,134,450
Premium on bonds payble (6622000/40)					165550
Cash Account						3,300,000