Question

Coffman Company sold bonds with a face value of $1,080,000 for $1,020,000. The bonds have a coupon rate of 9 percent, mature in 10 years, and pay interest semiannually every June 30 and December 31. All of the bonds were sold on January 1 of this year. Record the sale of the bonds on January 1 and the payment of interest on June 30 of this year, without the use of a discount account. Coffman uses the effective-interest amortization method. Assume an annual market rate of interest of 10 percent. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round final answers to whole dollar amounts.)

Answer 1

Answer:

Coffman Company

Journal Entries:

January 1 - Sale of Bonds

Debit Cash Account with $1,020,000

Debit Bonds Discount with $60,000

Credit Bonds Payable with $1,080,000

To record the sale of 9% bonds at a discount.

June 30:

Debit Interest on Bonds with $48,600

Credit Cash Account with $48,600

To record payment of interest on June 30.

Explanation:

1. Bonds as a financing source can be issued at par value, premium, or discount.  It is issued at a discount when the interest rate is less than the market rate.  The purpose of issuing them at a discount is to attract investors to purchase the bonds, which will be repaid at the par value.

2. Interest for the half-year was calculated as follows: $1,080,000 x 9%/2 since the interest is payable semiannually.  This implies that the effective semiannual interest rate is 4.5%.