Question

On January 1, 2017, Powell Corporation issued $600,000, 5%, 5-year bonds dated January 1, 2017, at 95. The bonds pay annual interest on January 1. The company uses the effective interest method of amortization and has a calendar year end. The market interest rate is 6%. Prepare all the journal entries that Powell Corporation would make related to this bond issue through January 1, 2018. Be sure to indicate the date on which the entries would be made.

January 1, 2017:

dr. cash $570,000

dr. discounts on bonds payable $30,000

cr. Bonds payable $600,000

December 31, 2017:

January 1, 2018:

Answer 1

the following are the journal entries:

date	accounts	debit	credit
january 1 2017	Cash a/c	570,000
	discount on bonds payable a/c	30,000
	...................To Bonds payable a/c		600,000
december 31 2017	Interest expense	34,200
	..........To discount on bonds payable		4,200
	..........To Interest payable		30,000
january 1 2018	Interest payable a/c	30,000
	..........To Cash a/c		30,000

working:

since effective interest method is used:

interest expense for first year = cash received * effective interest rate

=>570,000*6%

=>34,200.

interest payable = face value of bonds * stated interest

=>$600,000*5%

=>$30,000.

discount on bonds payable to be credited =interest expense - interest payable

=>34,200 - 30,000

=>4,200.