Question

On February 1, 2021, Strauss-Lombardi issued 9% bonds, dated February 1, with a face amount of $860,000. The bonds sold for $786,220 and mature on January 31, 2041 (20 years). The market yield for bonds of similar risk and maturity was 10%. Interest is paid semiannually on July 31 and January 31. Strauss-Lombardi’s fiscal year ends December 31.Required: a. Prepare the journal entry to record their issuance by Strauss-Lombardi on February 1, 2013. b. Prepare the journal entry to record interest on July 31, 2013 (at the effective rate). c. Prepare the adjusting entry to accrue interest on December 31, 2013. d. Prepare the journal entry to record interest on January 31, 2014.

Answer 1

Answer:

cash   786,220 debit

discount on BP 73,780 debit

  bonds payable    860,000 credit

--to record issuance of bonds below par--

interest expense 39311 debit

discount on BP 611 credit

cash            38700 credit

--to record first payment--

interest expense  39341.55 debit

amortization          641.55 credit

interest payable      38,700 credit

--to record accrued interest on Dec 31th--

interest payable 38,700 debit

        cash                 38,700 credit

--to record interest payment--

Explanation:

interest will be carrying value times market rate:

principal x rate x time

786,220 x 0.10 x 1/2 = 39,311

Then we compare agaisnt the actual cash outlay:

860,000 x 0.09 x 1/2 = 38,700

the difference is the amortization on the bond payable  discount.

We adjust the caryring value:

786,220 - 611 = 785.609‬

and repeat the process.