Question

Effective April 1,2014, The Bloomington Corporation , which has a December 31 year end, authorized $1,500,000 of callable , montage bonds (secured by $2,200,000 of property and equipment , at marked value). The bonds paid interest at a rate of eight precent per year and had a term of six years. Interest was payable each September 30 and march 31. On July 1,2015 Bloomington issued 1,000 of the bonds in exchange for $906,000 in cash. On October 1,2017 Bloomington called the bonds and paid the existing bondholders $1,150,000 in cash.

Prepare the journal entries related to the bonds the Bloomington made for the period April 1, 2014 through December 31,2015. In addition , prepare the journal entry the company made when it redeemed the bonds in October 2017.

Answer 1

Journal entries

1. Cash a/c dr $906,000

Discount a/c dr $94,000

To bonds payable a/c cr $1,000,000

(bonds always have a face value of $1,000 or $100. In above case the bonds have a face value of $1,000 and are issued at discount)

2. Accured interest a/c dr $20,000

To interest payable a/c cr $20,000

($1,000,000 × 8% = $80,000 × 3 ÷ 12 = $20,000)

Journal entries for 2017

1. Bonds payable a/c dr $1,150,000

To premium on bonds a/c cr $150,000

To cash a/c cr $1,000,000