Question

On January 1, 2020, JWS Corporation issued $600,000 of 7% bonds, due in 10 years. The bonds were issued for $644,636, and pay interest each July 1 and January 1. The effective-interest rate is 6%.
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.

JWS uses the effective-interest method.

Answer 1

Answer:

The Journal entries are as follows:

(a) On January 1,

Cash A/c Dr. $644,636

   To Premium on bonds payable    $44,636

   To bonds payable                         $600,000

(To record the issuance)

(b) On July 1,

Interest expense A/c                   Dr. $19,339

Premium on bonds payable A/c Dr. $1,661

             To cash A/c                                          $21,000

(To record the interest expense)

Workings:

Interest expense:

= $644,636 × 6% × (6/12)

= $19,339

Cash:

= $600,000 × 7% × (6/12)

= $21,000

(c) On December 31,

Interest expense A/c                   Dr. $19,289

Premium on bonds payable A/c Dr. $1,711

             To Interest payable A/c                                          $21,000

(To record the adjusting entry)

Workings:

Interest expense:

= ($644,636 - $1,661) × 6% × (6/12)

= $19,289

Interest payable:

=  $600,000 × 7% × (6/12)

= $21,000