Question

On December 31, 2018, Squidward Corporation issued $500,000, 8 % , 20-year bonds for $414,210 cash when the market rate of interest was 10%. The bonds pay interest semi-annually each June 30 and December 31. Squidward uses the effective interest method of amortization to amortize and premium or discount. Give the general journal entries required on (1) December 31, 2018 to record the issue of the bonds and (2) June 30, 2018, the first interest payment date. Make your entries in the attached workpaper. You do not have to make an entry here at Wileyplus.

Answer 1

Solution 1:

Journal Entries - Squidward Corporation
Date	Particulars	Debit	Credit
31-Dec-18	Cash Dr	$414,210.00
	Discount on bond payable Dr	$85,790.00
	To Bond Payable		$500,000.00
	(To record issue of bond)
30-Jun-19	Interest expense Dr	$20,711.00
	To Cash		$20,000.00
	To Discount on bond payable		$711.00
	(To record semiannual interest payment and discount amortization)

Solution 2:

Total interest expense over life of bond = Total interest paid + Principal payment at maturity - Amount borrowed

= ($20,000*40) + $500,000 - $414,210

= $885,790