Question

On January 1, 2019, Denver Corporation issued 10-year, 4% bond with a maturity value of $260,000. The bonds sells at 94.00 and pay interest on July 1 and January 1. Denver Corporation amortizes the bond using the effective interest rate method. The market rate is 5%.

Required

Prepare the journal entries to record the sale of the bond, the interest expense for July 1 and the interest accrual for December 31 (company has a year end of December 31). Explanations are not required.

Answer 1

Journal entry for sale of bond is:

Date	General journal	Debit	Credit
January 1, 2019	Cash [$260000 * $94 / $100 ]	$244400
	Discount on bonds payable	$15600
	Bonds payable		$260000

Journal entry for interest expense on July 1:

Date	General Journal	Debit	Credit
July 1	Interest expense [$244400 * 5% * 6 / 12 ]	$6110
	Discount on bonds payable		$910
	Cash [  $260000 * 4% * 6/12]		$5200

journal entry for interest accrual on Decemeber 31 is:

Date	General Journal	Debit	Credit
December 31	Interest expense [($244400 + $910) * 5% * 6 / 12]	$6132.75
	Discount on bonds payable		$932.75
	Interest payable [ $260000 * 4% * 6/12]		$5200