Question

On January 1, 2020, Pearl Corporation issued $610,000 of 9% bonds, due in 10 years. The bonds were issued for $571,991, and pay interest each July 1 and January 1. Pearl uses the effective-interest method.

Prepare the company’s journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry. Assume an effective-interest rate of 10%.

Answer 1

(a)

January 1	Cash	$571,991
	Bonds discount	$38,009
	Bonds payable		$610,000

(b)

July 1	Interest expense	$28,600 ($571,991*5%)
	Bond discount		$1,150
	Cash		$27,450 ($610,000*4.5%)

(c)

December 31	Interest expense	$28,657 [($571,991+1,150)*5%]
	Bond discount		$1,207
	Cash		$27,450 ($610,000*4.5%)