Question

On July 1, 2019, East Carolina Chair Company issued $700,000 face value of 5%, 20 year bonds. The bonds call for semiannual interest payments and they mature on July 1, 2039. The company received cash of $492,176, a price that provides an annual yield of 8%. The company's fiscal year ends on March 31. Required: Using the interest method of accounting for bonds, prepare journal entries (to the nearest dollar) to record the following: A. The issuance of the bonds B. The payment of the first interest payment on January 1, 2020 C. The adjustment needed on March 31, 2020

Answer 1

Date	Account title	Debit	credit
July 1,2019	cash	492176
	Discount on bond payable	207824
	Bond payable		700000
Jan 1 2020	Interest Expense	19687.04
	Discount on bond payable		2187.04
	cash		17500
31March 2020	Interest Expense [19774.52*3/6]	9887.26
	Discount on bond payable		1137.26
	Interest payable [17500*3/6]		8750
	[Being interest accrued for 3 months (1Jan - 31Mar) out of 6 months calculated in below table]

Working :

b)Semiannual yield = 8*6/12 = 4%

semiannual coupon = 5*6/12 = 2.5%

Date/period	Interest expense[A]	Interest paid [B]	Discount amortized[A-B]	Carrying value at end
1/7/2019			207824	492176
1/1/2020	492176*4%= 19687.04	700000*2.5%= 17500	2187.04	492176+2187.04= 494363.04
1/7/2020	494363.04*4%= 19774.52	17500	2274.52	494363.04+2274.52= 496637.56