Question

On January 1, 2016 Able Company issued (sold) $500,000 8% bonds 20 year bonds for $460,000 when the market rate of interest

was 10%. These semi-annual bonds pay interest on July 1 and January 1 of each year.

On January 2, 2017 Able Company retired the bonds by paying $471,000.

REQUIRED;

A) MAKE THE JOURNAL ENTRY ABLE MAKES WHEN IT SELLS THE BONDS ON JANUARY 1, 2016

B) MAKE THE JOURNAL ENTRY ABLE MAKES ON JULY 1 2016 WITH THE FIRST INTEREST PAYMENT

C) MAKE THE JOURNAL ENTRY ABLE MAKES ON DECEMBER 31, 2016 CONNECTED WITH THE BONDS

D) MAKE THE JOURNAL ENTRY ABLE MAKES ON JANUARY 2, 2017 WHEN IT RETIRES THE BONDS.

Answer 1

In the books of Able Company:

Transaction	Date	Account Titles	Debit	Credit
			$	$
A.	Jan 1, 2016	Cash	460,000
		Discount on Bonds Payable	40,000
		Bonds Payable		500,000
B.	July 1, 2016	Interest Expense ( $ 460,000 x 5 %)	23,000
		Discount on Bonds Payable		3,000
		Cash		20,000
C.	Dec 31, 2016	Interest Expense ( 463,000 x 5 %)	23,150
		Discount on Bonds Payable		3,150
		Interest Payable		20,000
D.	Jan 2, 2017	Bonds Payable	500,000
		Loss on Redemption of Bonds	4,850
		Discount on Bonds Payable		33,850
		Cash		471,000

As nothing was mentioned, the effective interest method was used for bond discount amortization.