Answer:
Twister Enterprises
Bonds Issuance and Interests:
1. Market Interest rate is 8%: The bonds are issued at par.
January 1, 2021:
Debit Cash Account $580,000
Credit 8% Bonds Payable $580,000
To record the issue of 10-year bonds at par.
June 30, 2021:
Debit Interest on Bonds $23,200
Credit Cash Account $23,200
To record the semiannual interest payments.
December 31, 2021:
Debit Interest on Bonds $23,200
Credit Cash Account $23,200
To record the semiannual interest payments.
2. Market Interest Rate is 9%: The bonds are issued at a discount.
January 1, 2021:
Debit Cash Account $542,277
Debit Discount on Bonds $37,723
Credit 8% Bonds Payable $580,000
To record the issue of 10-year bonds at a discount.
June 30, 2021:
Debit Interest on Bonds $23,200
Credit Cash Account $23,200
To record the semiannual interest payments.
December 31, 2021:
Debit Interest on Bonds $23,200
Credit Cash Account $23,200
To record the semiannual interest payments.
December 31, 2021:
Debit Interest on Bonds $3,772
Credit Discount on Bonds $3,772
To amortize the discount on bonds for the year, using the straight-line method.
3. The market interest rate is 7%. The bonds are issued at a premium:
January 1, 2021:
Debit Cash Account $621,216
Credit Bonds Premium $41,216
Credit 8% Bonds Payable $580,000
To record the issue of 10-year bonds at a premium.
June 30, 2021:
Debit Interest on Bonds $23,200
Credit Cash Account $23,200
To record the semiannual interest payments.
December 31, 2021:
Debit Interest on Bonds $23,200
Credit Cash Account $23,200
To record the semiannual interest payments.
December 31, 2021:
Debit Bonds Premium $4,122
Credit Interest on Bonds $4,122
To amortize the premium on bonds for the year, using the straight-line method.
Explanation:
A bond is issued at par when investors pay the face value of a bond because its stated interest rate is equal to the prevailing market rate.
A bond discount occurs when investors pay less than the face value of a bond because its stated interest rate is lower than the prevailing market rate. The interest expense is increased by the amortization of the bond discount. Note that the amortization had been done annually. It could also be done semi-annually.
A bond premium occurs when investors are willing to pay more than the face value of a bond because its stated interest rate is higher than the prevailing market interest rate. The interest expense is reduced by the amortization of the premium.
The straight-line interest method has been used in this case, because no information is available about the changes in the bonds' book value. The other method is the effective interest method. This technique calculates the actual interest rate in a period based on the amount of a financial instrument's book value at the beginning of the accounting period. Thus, if the book value of a financial instrument decreases, so too will the amount of related interest and vice versa.
The straight-line method or the effective interest method is also used to amortize bond premiums and bond discounts.
