Question

Columbus Company issued $90,000 of 10-year, 9% bonds payable on January 1, 2018. Columbus Company pays interest each January 1 and July 1 and amortizes discount or premium by the straight-line amortization method. The company can issue its bonds payable under various conditions. Read the requirements. Requirement 1. Journalize Columbus Company's issuance of the bonds and first semiannual interest payment assuming the bonds were issued at face value. Explanations are not required. (Record debits first, then credits. Exclude explanations from any journal entries.) Journalize the issuance of the bond payable at face value. Date Accounts Debit Credit 2018 Jan. 1

Answer 1

1.

date	accounts	debit	credit
jan 1 2018	cash a/c	90,000
	.........To 9% bonds payable a/c		90,000
july 1 2018	Interest on bonds payable a/c	4,050
	........To cash a/c		4,050
	(amount =90,000*9%*6/12 =>$4,050)

2.

jan 1 2018	cash a/c	86,400
	Discount on bonds payable	3,600
	............To cash a/c		90,000
	(cash a/c = 90,000*96%=>86,400) (discount = 90,000-86,400 =>3,600)
jul 1	Interest on bonds payable a/c	4,230
	........To cash a/c		4,050
	.........To discount on bonds payable		180
	(cash = 90,000 face value *9%*6/12=>4,050..discount on bonds payable = 3600 total discount / (10 years * 2 payments each year)=>3600/20=>$180) interest = 4050+180=.>4,230.

3.

jan 1 2018	cash a/c	96,300
	.........To premium on bonds payable a/c		6,300
	..........To Bonds payable a/c		90,000
	(cash = 90,000*107%=>96,300) (premium on bonds payable =>96,300 cash -90,000 face value =>6,300)
jul 1 2018	interest on bonds payable a/c	3,735
	premium on bonds payable a/c	315
	...........To cash a/c		4,050
	cash = 90,000*9%*6/12=>4050. premium on bonds payable written off = 4050, premium on bonds payable = 6300 total premium / (10 years *2 payments)=>6300/20=>315 interest on bonds payable =>4050-315 =>$3,735

4.Discounted bond price (in 2 above) will result in highest interest expense.

This is because one has to pay interest in cash i.e $4,050 and also write off the discount given on bonds payable.

So every time interest is paid, there will also be a write off of discount on bonds payable by the following amount:

$3600 total discounts / (10 years * 2 payments each year)

=>$3600 / 20 payments

=>$180.

This $180 will be written off per interest payment.

So this $180 will be added to the interest payment of $4050 to comprise interest expense.

So the Interest expense when the bonds are issued will be highest at $4,230.

This amount will be lowest when bond is issued at a premium.