Question

Taylor Corporation issued $2 million, 10-year, 8% bonds on January 1, 2011. Instructions: Prepare the entries to record the sale of these bonds and the first semi-annual payment of interest, assuming they were issued at the following. Use the effective interest method of amortization of the discount or premium. (a) 93.5, with an effective rate of 9%. (b) 107.1, with an effective rate of 7%.

Answer 1

(a)

Date	Account title and explanation	Debit	Credit
Jan. 1, 2011	Cash ($2,000,000x93.5%)	1,870,000
	Discount on bonds payable	130,000
	Bonds payable		2,000,000
	(To record the sale of bonds)
Jun. 30, 2011	Interest expense (1,870,000x4.5%)	84,150
	Discount on bonds payable		4,150
	Cash (2,000,000x4%)		80,000
	(To record the first semi-annual payment of interest)

(b)

Date	Account title and explanation	Debit	Credit
Jan. 1, 2011	Cash ($2,000,000x107.1%)	2,142,000
	Premium on bonds payable		142,000
	Bonds payable		2,000,000
	(To record the sale of bonds)
Jun. 30, 2011	Interest expense (2,142,000x3.5%)	74,970
	Premium on bonds payable	5,030
	Cash (2,000,000x4%)		80,000
	(To record the first semi-annual payment of interest)