Question

On January 1, 2017, Borse Company issued 5-year bonds with a face value of $800,000. The bonds have a 7% contact rate . Fiscal year end is December 31.

[1] Assuming the bonds are issued at 95, interest is paid annually on January 1. Preparing journal entries to record the (a) issuance of the bonds,(b) accrual of interest on the bonds and amortization on December 31, 2017, and (c) pay of interest on January 2018.

[2] Assuming the bonds are issued at 102, interest is paid annually on December 31. Preparing journal entries to record the (a) issuance of the bonds,(b) payment of interest on the bonds and amortization on December 31, 2019.

Answer 1

1) Journal entry

date	account and explanation	debit	Credit
Jan 1	Cash (800000*.95)	760000
	Discount on bonds payable	40000
	Bonds payable		800000
	(To record bond issue)
Dec 31	Interest expense	64000
	Discount on bonds payable (40000/5)		8000
	Interest payable (800000*7%)		56000
	(To record accrued interest)
Jan 1	Interest payable	56000
	Cash		56000
	(To record interest paid)

2) Journal entry

date	account and explanation	debit	Credit
Jan 1	Cash (800000*102/100)	816000
	Premium on bonds payable		16000
	Bonds payable		800000
	(To record bond issue)
Dec 31	Interest expense	52800
	Premium on bonds payable (16000/5)	3200
	Cash (800000*7%)		56000
	(To record interest)