Question

Barnett Industries, Inc., issued $600,000 of 8% bonds on January 1, 2019. The bonds pay interest semiannually on July 1 and January 1. The maturity date on these bonds is December 31, 2028. The firm uses the effective interest method of amortizing discounts and premiums. The bonds were sold to yield an effective interest rate of 9%. Barnett incurred legal and investment banking fees of $22,000 in issuing the bonds and amortizes these costs annually on a straight-line basis.
Required:

1. Calculate the selling price of the bonds.
2. Prepare journal entry for the issuance of the bonds and bond issue costs.
3. Assume that Barnett uses IFRS. Prepare the journal entry for the issuance of the bonds.

Answer 1

Answer:

1. The selling price of the bonds is $590.976.46

2 .The journal entry for the issuance of the bonds and bond issue costs would be as follows:

                                                      Debit                          Credit

Cash                                             $538,976.26

Discount on bonds payable       $39,023.74

Unamortized bonds issue costs $22,000

                                       Bonds Payable                       $600,000

3. Assuming that Barnett uses IFRS,  the journal entry for the issuance of the bonds would be as follows:

                     Debit                      Credit              

Cash             $600,000

          Bonds Payable             $600,000

Explanation:

In order to calculate the selling price of the bonds we would have to calculate first the present value of particular and present value of interest, hence:

present value of particular=($600,000×0.414643)=$248,785.80

present value of interest=$600,000×4%13.007936=$312,190.46

Therefore, selling price of the bonds=present value of particular+present value of interest

1. Selling price of the bonds=$248,785.80+$312,190.46=$590.976.46

2. The journal entry for the issuance of the bonds and bond issue costs would be as follows:

                                                      Debit                          Credit

Cash                                             $538,976.26

Discount on bonds payable       $39,023.74

Unamortized bonds issue costs $22,000

                                       Bonds Payable                       $600,000

3. Assuming that Barnett uses IFRS,  the journal entry for the issuance of the bonds would be as follows:

                     Debit                      Credit              

Cash             $600,000

          Bonds Payable             $600,000