Question

During Year 1 and Year 2, Agatha Corp. completed the following transactions relating to its bond issue. The corporation’s fiscal year is the calendar year.

Year 1

Jan.		1		Issued $330,000 of 8-year, 8 percent bonds for $324,000. The annual cash payment for interest is due on December 31.
Dec.		31		Recognized interest expense, including the straight-line amortization of the discount, and made the cash payment for interest.
Dec.		31		Closed the interest expense account.

Year 2

Dec.		31		Recognized interest expense, including the straight-line amortization of the discount, and made the cash payment for interest.
Dec.		31		Closed the interest expense account. a) Prepare the general journal entries for the above transactions. b) Prepare the liabilities section of the balance sheet at December 31, Year 1 and Year 2. c) Determine the amount of interest expense that will be reported on the income statements for Year 1 and Year 2. d) Determine the amount of interest that will be paid in cash to the bondholders in Year 1 and Year 2.

Answer 1

Solution a:

Journal Entries - Agatha Corp.
Date	Particulars	Debit	Credit
Year 1, Jan1	Cash Dr	$324,000.00
	Discount on issue of bond Dr	$6,000.00
	To Bond Payable		$330,000.00
	(To record issue of bond)
Year 1, Dec 31	Interest expense Dr	$27,150.00
	To Cash		$26,400.00
	To Discount on issue of bond		$750.00
	(To record interest payment and discount amortization)
Year 1, Dec 31	Income summary Dr	$27,150.00
	To Interest Expense		$27,150.00
	(To close interest expense)
Year 2, Dec 31	Interest expense Dr	$27,150.00
	To Cash		$26,400.00
	To Discount on issue of bond		$750.00
	(To record interest payment and discount amortization)
Year 2, Dec 31	Income summary Dr	$27,150.00
	To Interest Expense		$27,150.00
	(To close interest expense)

Solution b:

Balance Sheet (Partial)
As of Dec 31, Year 1
Particulars		Amount
Long term laibilities:
Bond Payable	$330,000.00
Less: Discount on issue of bond	$5,250.00
Net Bond Liability		$324,750.00

Balance Sheet (Partial)
As of Dec 31, Year 2
Particulars		Amount
Long term laibilities:
Bond Payable	$330,000.00
Less: Discount on issue of bond	$4,500.00
Net Bond Liability		$325,500.00

Solution c:

Amount of interest expense that will be reported on the income statements for Year 1 and Year 2:

Year 1 = $27,150

Year 2 = $27,150

Solution d:

Amount of interest that will be paid in cash to the bondholders in Year 1 and Year 2:

Year 1 = $26,400

Year 2 = $26,400