Question

Simko Company issued $750,000, 8-year, 6 percent bonds on January 1, 2018. The bonds were issued for $710,000. Interest is payable annually on December 31. Using straight-line amortization, prepare journal entries to record (a) the bond issuance on January 1, 2018, and (b) the payment of interest on December 31, 2018.

Answer 1

Answer:

Bond issuance:

Dr cash                                          $710,000

Dr discount on bonds payable    $40,000

Cr bonds payable                                           $750,000

The payment of interest on December 31, 2018:

Dr interest expense     $50,000

Cr discount on bonds payable    $5000

Cr cash                                           $45,000

Explanation:

The bonds were issued at a discount to their face value, as a result, the discount on bonds payable is computed thus:

discount on bonds payable=$750,000-$710,000=$40,000

Bonds payable would be credited with $750,000 while cash and discount on bonds payable would be debited with $710,000 and $40,000 respectively

annual discount amortization=$40,000/8=$5000

annual coupon=$750,000*6%=$45000