Question

On March 1, 2018, Stratford Lighting issued 14% bonds, dated March 1, with a face amount of $300,000. The bonds sold for $294,000 and mature on February 28, 2038 (20 years). Interest is paid semiannually on August 31 and February 28. Stratford uses the straight-line method and its fiscal year ends December 31.
1.Prepare the journal entry to record the issuance of the bonds by Stratford Lighting on March 1, 2013

2.Prepare the journal entry to record interest on August 31, 2013

3.Prepare the journal entry to accrue interest on December 31, 2013.

4.Prepare the journal entry to record interest on February 28, 2014

Answer 1

Explanation:

The journal entries are as follows

1. Cash Dr $294,000

Discount on bonds payable $6,000

             To Bonds payable $300,000

(Being the issuance of the bond is recorded)

2. Bond interest expense $21,150

              To Discount on bonds payable $150

              To Cash $21,000

(Being the bond interest expense is recorded)

The computation is shown below:

For bond interest expense

= $300,000 × 14% ÷ 2

= $21,000

And, the discount on bond payable is

= ($300,000 - $294,000) ÷ 40 years

= $150

3. Bond interest expense $14,100

             To Discount on bonds payable $100

             To Bond interest payable $14,000

(Being the accrued interest is recorded)

The bond interest expense is

= $21,000 × 4 months ÷ 6 months

= $14,000

The discount on bond payable is

= $150 × 4 months ÷ 6 months

= $100

4. Bond interest payable $14,000

   Bond interest expense $7,050

             To  Discount on bonds payable $50

              To Cash $21,000

(Being the interest is recorded)