Answer:
Coffman Company
Journal Entries:
January 1 - Sale of Bonds
Debit Cash Account with $1,020,000
Debit Bonds Discount with $60,000
Credit Bonds Payable with $1,080,000
To record the sale of 9% bonds at a discount.
June 30:
Debit Interest on Bonds with $48,600
Credit Cash Account with $48,600
To record payment of interest on June 30.
Explanation:
1. Bonds as a financing source can be issued at par value, premium, or discount. It is issued at a discount when the interest rate is less than the market rate. The purpose of issuing them at a discount is to attract investors to purchase the bonds, which will be repaid at the par value.
2. Interest for the half-year was calculated as follows: $1,080,000 x 9%/2 since the interest is payable semiannually. This implies that the effective semiannual interest rate is 4.5%.
