Question

1. David raised working capital from local investors by issuing bonds. The bonds, which have a face value of $40,000, were sold on July 1st, 2018. They have a coupon rate of 7.40 percent and pay interest monthly for three years with the first payment due on August 1st, 2018. The last payment, which includes repayment of principal, is July 1st, 2021. David’s investors agreed on an issue price of 106.

Required: Prepare journal entries to record all transactions and adjustments for the year ending December 31, 2018 (record all of the entries in a single sheet).

Answer 1

Journal Entries for the year ending December 31 , 2018

July 1 , 2018 Bank a/c Dr 40,000

To Bonds ( Liability) a/c 40,000

( Being amount raised by issue of bonds)

Aug 1, 2018 Interest on Bonds 247

To bank a/c 247

( Being coupon/interest payments made monthly on $ 40,000 face value bonds @ 7.4% )

Sep 1, 2018 Interest on Bonds 247

To bank a/c 247

( Being coupon/interest payments made monthly on $ 40,000 face value bonds @ 7.4% )

Oct 1, 2018 Interest on Bonds 247

To bank a/c 247

( Being coupon/interest payments made monthly on $ 40,000 face value bonds @ 7.4% )

Nov 1, 2018 Interest on Bonds 247

To bank a/c 247

( Being coupon/interest payments made monthly on $ 40,000 face value bonds @ 7.4% )

Dec 1, 2018 Interest on Bonds 247

To bank a/c 247

( Being coupon/interest payments made monthly on $ 40,000 face value bonds @ 7.4% )

Dec 31, 2018 Interest on Bonds 247

To Interest Payable 247

( Being interest due for 31st dec 2018 recorded as liability on account of year close and the same will be discharged on 1st Jan 2019)