Question

On January 1, 2019, The Pangborn Company issued $100,000 of its ten-year, 6% bonds payable at $108,000 to yield a market rate of 5%. The bonds were dated January 1, 2019, and interest is paid semiannually on each June 30 and each December 31. The effective interest method is used for amortization and no adjusting journal entries were made during the year.

1. Prepare the journal entry for the sale of the bonds.
2. Prepare the journal entry to record the first interest payment and include the appropriate date before the entry.
3. Prepare the journal entry to record the second interest payment and include the appropriate date before the entry.

Answer 1

Answer-

A.

Date	Account titles and explanation	Debit	Credit
January 1, 2019	Cash	$108,000
	Premium on bonds payable		$8,000
	Bonds payable		$100,000

B.

Date	Account titles and explanation	Debit	Credit
June 30, 2019	Interest expense ($108,000*2.5%)	$2,700
	Bond premium	$300
	Cash ($100,000*3%)		$3,000

C.

Bond carrying value = $108,000 - $300 = $107,700

Date	Account titles and explanation	Debit	Credit
December 31, 2019	Interest expense ($107,700*2.5%)	$2,693
	Bond premium	$307
	Cash ($100,000*3%)		$3,000

* Interest expense rounded to nearest dollar