Question

On January 1, 2020, Ownbey Corporation issued $4,000,000,8%, 5-year bonds dated January 1, 2020, at 96. The bonds pay annual interest on January 1. The company uses the straight-line method of amortization and has a calendar year end. Instructions: A. Prepare the journal entries that Ownbey Corporation would make related to the bonds to: 1) Record the issuance of the bonds on Jan 1, 2020; 2) Record the accrue interest payable and amortization of the premium or discount on Dec 31; and 3) Record the payment of the interest on January 1, 2021.

Answer 1

1) Entry on Jan 1, 2020

Bank Dr (40,000*96) $38,40,000

Discount on issue of bonds Dr (40,000*4) $1,60,000

To 8% 5 year Bonds $40,00,000

(Being bonds issued)

2) Entry on Dec 31, 2020

Interest Dr (40,000*8) $3,20,000

To Interest Payable $3,20,000

(Being interest payable)

Profit & Loss Dr (160,000/5) $32,000

To Discount on issue of bonds $32,000

(Being discount written off)

3) Entry on Jan 1, 2021

Interest Payable $3,20,000

To Bank $3,20,000

(Being interest paid)