Question

On May 1, 2015, Herron Corp. issued $600,000, 9%, 5-year bonds at face value. The bonds were dated May 1, 2015, and pay interest semiannually on May 1 and November 1. Financial statements are prepared annually on December 31.
a. Prepare the journal entry to record the issuance of the bonds. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)
b. Prepare the adjusting entry to record the accrual of interest on December 31, 2015. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)
c. Show the balance sheet presentation on December 31, 2015. (For Bonds Payable, Notes Payable and Mortgage payable enter the account name only and do not provide any additional descriptive information e.g. due 2017.)
d. Prepare the journal entry to record payment of interest on May 1, 2016, assuming no accrual of interest from January 1, 2016, to May 1, 2016. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)
e. Prepare the journal entry to record payment of interest on November 1, 2016. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)
f. Assume that on November 1, 2016, Herron calls the bonds at 102. Record the redemption of the bonds.

Answer 1

Herron Corp

A. Journal entry

Dr Cash 600,000

Cr Bonds Payable 600,000

B. Adjusting entries as at Dec 31, 2015

Dr Interest Expense 9,000

Cr Interest Payable ($600,000 x 9% x 2/12) 9,000

C. Balance sheet as at December 31, 2015

Current liabilities

Interest Payable 9,000

Long term Liabilities

Bonds Payable 600,000

D. Journal entry as at May 1, 2016

Dr Interest Expense ($600,000 x 9% x 4/12) 18,000

Dr Interest Payable 9,000

Cr Cash 27,000

(e) Journal entry Nov 1, 2016

Dr Interest Expense 27,000

Cr Cash ($600,000 x 9% x 1/12) 27,000

F. Bonds at 102 on Nov 1,2016

Dr Bonds Payable 600,000

Dr Loss on Bond Redemption 12,000

Cr Cash ($600,000 x 1.02) 612,000