Question

On January 1, 2017, Boston Enterprises issues bonds that have a $2,150,000 par value, mature in 20 years, and pay 6% interest semiannually on June 30 and December 31. The bonds are sold at par. 1. 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, 2017; (b) the first interest payment on June 30, 2017; and (c) the second interest payment on December 31, 2017. 3. Prepare the journal entry for issuance assuming the bonds are issued at (a) 97 and (b) 103.

Answer 1

Answer:

1.- cash proceeds 64,500

2.- (A)

cash 2,150,000

   bonds payable      2,150,000

 to record issuance

2.- (B)

interest expense   64,500

cash                                    64,500

to record first interest payment

2.- (C)

interest expense   64,500

cash                                    64,500

to record second interest payment

3.-(A)

Cash                                    2,085,500

discount on bonds payable    64,500

Bonds Payable                                        2,150,000

3.-(B)

Cash                                    2,214,500

Bonds Payable                                        2,150,000

premium on bonds payable                       64,500

Explanation:

1.-

2,150,000 x 6%/2 = 64,500 cash proceeds

the rate must be divide by 2 because it is an annual rate and the payment are semiannually (2 per year)

2.- the bonds were issued at par, so no premium or discount was conceed.

The interest expense will match the cash payment, because there is no premium or discount to amortize.

3.-

(A)

2,150,000 x 97/100 = 2,085,500

face value                   (2,150,000)

discount                          64,500

(B)

2,150,000 x 103/100 = 2,214,500

face value                   (2,150,000)

premium                          64,500