Question

On June 1, 2020, Shebandowan Investors Inc. issued a $4,800,000, 12%, three-year bond. Interest is to be paid semiannually beginning December 1, 2020. Assume that the market rate of interest is 13%. Use TABLE 14A.1 and TABLE 14A.2. (Use appropriate factor(s) from the tables provided.)

Required:
Part 1
Record the following entries: (Do not round intermediate calculations. Round the final answers to the nearest whole dollar.)

a. Issuance of the bonds on June 1, 2020
b. Payment of interest on December 1, 2020
c. Adjusting entry to accrue bond interest and discount amortization on January 31, 2021
d. Payment of interest on June 1, 2021

Assume Shebandowan Investors Inc. has a January 31 year-end.
Part 2
Show how the bonds will appear on the balance sheet under non-current liabilities at January 31, 2022. (Do not round intermediate calculations. Round the final answers to the nearest whole dollar.)

Answer 1

Part -1 : Journal Entries :

June -01-2020.

Bank A/c - dr. 4800000$

To 12% bonds A/c 4800000$

( Being bonds issued redeemable after 3 yrs )

Dec-01-2020.

Interest A/c. - Dr. 288000$

To bank A/c. 288000$.

( Being semi annual interest on bond paid )

Jan-31-2021.

Given Jan 31st has the year end of shebandowan inc.

Interest accrued A/c - dr 96000$

To interest payable A/c 96000$

( Being interest on bonds are accrued for dec and Jan )

4800000$×12%×2/12 = 96000$

Amortization expense:

Amortization of discount on issue of bonds at the interest rate lower than the prevailing market interest rate

Amortization of discount is the best way to reflect the economic interest on the bonds

Amortization cost for the year

4800000$*1%*8m/12m = 32000$

Interest on bonds A/c - dr 32000$

To discount on bonds A/c 32000$

( Being discount on bonds amortised for the year ).

D) Payment of interest .

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