Question

Pretzelmania, Inc., issues 5%, 20-year bonds with a face amount of $50,000 for $44,221 on January 1, 2021. The market interest rate for bonds of similar risk and maturity is 6%. Interest is paid semiannually on June 30 and December 31. Required: 1. & 2. Record the bond issue and first interest payment on June 30, 2021. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field. Round your intermediate computations and final answers to the nearest whole dollar amount.)

Answer 1

Answer: Please see Explanation for answer.

Explanation:

January 01, 2021:

Cash Debit 44,221

Bonds Payable Credit 44,221

Since the bonds were sold at a discount, the entry to record the first interest payment (using straight line amortization of the premium) would be:

Interest expense ($44,221× 6% × 6months/12months ) = $1,326.63 =$1,327

Cash is given as ($50,000 × 5% ×6months /12months) = $1,250

June 30, 2021:

Interest Expense Debit---$1,326.63 Bonds Payable Credit $77

Cash Credit $1,250