Question

Kellyco wants to expand its production space. They need to acquire approximately $25,000,000. The company wants to issue a bond to obtain the funds needed. Their Investment Banker has recommended that the bonds should have an 10% stated interest rate and be issue for a 20 year term. Kellyco issued $25,000,000 worth of bonds on 1/1/18. Interest is paid annually and is amortized using the straight line method.

A. Assume the bonds sell at 95, make the required entries on 1/1/18 and 12/31/18

B. Assume the bonds sell at 105, make the required entries on 1/1/18 and 12/31/18

Answer 1

A.	Date	General Journal	Debit	Credit
	1/1/18	Cash ($25000000 x 95/100)	23750000
		Discount on bonds payable	1250000
		Bonds payable		25000000
		(To record the issuance of bonds)
	12/31/18	Interest expense	2562500
		Discount on bonds payable ($1250000/20)		62500
		Cash ($25000000 x 10%)		2500000
		(To record amortization of discount and interest payment)
B.	Date	General Journal	Debit	Credit
	1/1/18	Cash ($25000000 x 105/100)	26250000
		Premium on bonds payable		1250000
		Bonds payable		25000000
		(To record the issuance of bonds)
	12/31/18	Interest expense	2437500
		Premium on bonds payable ($1250000/20)	62500
		Cash ($25000000 x 10%)		2500000
		(To record amortization of premium and interest payment)