Question

On January 1, Boston Enterprises issues bonds that have a $1,300,000 par value, mature in 20 years, and pay 7% interest semiannually on June 30 and December 31. The bonds are sold at par.
A. How much interest will Boston pay (in cash) to the bondholders every six months?
2. Prepare journal entries to record (a) the issuance of bonds on January 1; (b) the first interest payment on June 30; and (c) the second interest payment on December 31.
3. Prepare the journal entry for issuance assuming the bonds are issued at (a) 96 and (b) 104.

Answer 1

Answer:

1. $45,500

2. Journal entries

3. Journal entries

Explanation:

The Interest amount can be calculated by multiplying the face value of bonds with annual interest and the time period. Journal entries are given below

Requirement 1  (Interest amount)

Interest amount  = Face value of bond x annual interest rate x 6/12

Interest amount  = 1,300,000 x 7% x 6/12

Interest amount  = $45,500

Requirement 2 (Journal entries to record issuance of bond and interest expense)

1 Jan (issuance of bond payable )

                                                   DEBIT          CREDIT

Cash                                        1,300,000

Bonds payable                                             1,300,000

30 June (interest expense recorded)

                                                   DEBIT          CREDIT

Cash                                          45,500

Bonds payable                                               45,500

31 Dec (interest expense recorded)

                                                   DEBIT          CREDIT

Cash                                          45,500

Bonds payable                                               45,500

Requirement 3 (Journal entry for issuance assuming bonds are issued at a.96 b.104)

At 96

                                                            DEBIT          CREDIT

Cash(1,300,000  x 96%)                 1,248,000

Discount(1,300,000 - 1248,000)      52,000

Bonds payable                                                      1,300,000

At 104

                                                              DEBIT        CREDIT

Cash(1,300,000  x 104%)                  1,352,000

Premium (1,300,000 - 1248,000)                            52,000

Bonds payable                                                        1,300,000