Question

A company issues 5%, 12-year bonds with a face amount of $70,000 for $64,070 on January 1, 2021. The market interest rate for bonds of similar risk and maturity is 6%. Interest is paid semiannually on June 30 and December 31.
Required:
Record the bond issue and first interest payment on June 30, 2021.

Answer 1

Answer:

Date              Particular                                Debit         Credit

Jan 1, 2021    Cash                                      $64,700

                      Discount on bond payable  $5,930

                               Bond payable                                 $70,000

Jun 30,2021  Interest expense                   $3,882

                      Discount on bonds payable                  $2,132

                      Cash                                                          $1,750

Workings:

Semi annual interest payment = 70,000 x 5% x 6/12

= $1,750

Interest expense on June 30, 2021 = Carrying value of bonds x Market interest rate

= 64,700  x 6%

= $3,882

Discount on bonds payable amortized on June 30, 2021 = Interest expense - Interest payment

= 3,882 - 1,750

= $2,132