Question

$300,000 of five-year bonds with a stated interest rate of 5% and a market rate of interest of 6% were issued at 98.

A)Record the journal entry at the issuance of the bonds on January 1, 2018.

B) If the bonds mentioned above paid interest semi-annually on a straight-line basis record the
payment of the first interest payment on June 30, 2018.

Answer 1

Issue price of Bond = $3,00,000 x 0.98 = $ 294000

Discount on issue of Bond = $3,00,000 - $2,94,000 = $6,000

(a)Journal entry at the issuance of the bonds on January 1, 2018

January 1,2018

Cash A/c	$2,94,000
Discount on Bond Payable A/c	$6,000
To Bond Payable		$3,00,000

(b)Journal Entry to record the payment of the first interest payment on June 30, 2018

June 30, 2018

Interest Expenses A/c	$8,100
To Discount on Bond Payable A/c		$600
To Cash A/c		$7,500

Amount of discount on issue of Bonds to be amortized in each semi annual period

= $6,000 / 10 Period (Since, the compounding is semi annually) = $600

Semi Annual Interest Expense on Bond = $3,00,000 x 2.5% = $7,500

Therefore, total amount to be debited to Bond Interest Expense will be

= $7,500 + $6,000 = $8,100