Question

On January 1, 2016 Legion Company sold $200,000 of 10%, ten-year bonds. Interest payable semiannually in June 30 and December 31. the bonds were sold for $180,000, priced to yield 12%. Legion records interest at the effective rate.

a. write the journal entry to recored the issue of the bond.

b. How much should Legion report bond interest expense for the six month ended June 30, 2016?

c. Write the journal entry for the first interest payment date on June 30?

d. How much the outstanding balance of the bond after the first interest payment?

Answer 1

Answer

• All working forms part of the answer
• Requirement ‘a’

Date	General Journal	Debit	Credit
01-Jan-16	Cash	$              180,000
	Discount on Bonds Payable	$                20,000
	Bonds Payable		$             200,000
	(Issue of Bonds recorded)

• Requirement ‘b’

Interest Expense for six month ending on 30 June 2016 = Carrying value x Yield Interest rate x 6 months/12 months

= $ 180,000 x 12% x 6/12

= $ 10,800 = Answer

• Requirement ‘c’

Date	General Journal	Debit	Credit
30-Jun-16	Interest Expense [180000 x 12% x 6/12]	$                10,800
	Discount on Bonds Payable		$                     800
	Cash [200000 x 10% x 6/12]		$               10,000
	(first interest payment made)

• Requirement ‘d’

Outstanding balance for Bonds payable will always remain $ 200,000 in Bonds Payable account.

However, when shown in Balance sheet, it will be shown in the following way:

Bonds Payable	$              200,000
Less: Discount on Bonds Payable [$20,000 –$ 800 Amortised]	$                19,200
Carrying Value of Bonds Payable	$              180,800