Question

2. Prepare journal entries for the following: On 1/1/19, Wiley issued $500,000 in 6% 5 year bonds when the effective interest rate was 8%. The bonds pay interest on 6/30 and 12/31 each year. Wiley has a 12/31 year end. a. Compute the issuance price and prepare an amortization table. b. Prepare journal entries for the bonds for 2019 c. Show the balance sheet presentations for the bonds on 12/31/19 d. Compute the total cost of borrowing for the bond. 3. Using the bond in scenario 2 above, Wiley redeemed $200,000 of the bonds on 12/31/21 for 102. Record the necessary journal entry for the redemption.

Answer 1

ANSWER.

Journal Entries.

1/1/19 Bank a/c Dr $500000

   to  6% Bonds  A/c $500000

( Being issuance of $500,000 in 6% 5 year bonds)

30/6/19 Profit & Loss A/c Dr $20000 (500000*8%*6/12)

to Interest on Bonds A/c $20000

( being half yearly Interest charged to Profit & Loss a/c)

Interest on Bonds A/c Dr $20000

   to Bank      A/c $20000

( Being interest payment made to Bond holders) (500000*8%*6/12)

31/12/19 Profit & Loss A/c Dr $20000

   to Interest on Bonds A/c $20000

( being half yearly Interest charged to Profit & Loss a/c)

Interest on Bonds A/c Dr $20000

   to Bank      A/c $20000

( Being interest payment made to Bond holders)

PROJECTED BALANCE SHEET OF WILEY FOR THE YEAR ENDED 31/12/19

EQUITIES & LIABILITIES

NON CURRENT LIABILITIES

Long term Borrowings

6% Bond $500000

Journal Entries.

31/12/21 6% Bonds A/c    Dr $200000

   to Bond holder's A/c $200000

( Being forfeiting or redemption of 6% Bonds costing $200000)

     Bond holder's A/c Dr  $200000

to bank   A/c $200000

( Being amount paid back to 6% Bond holder's )

Amortization of 6% Bonds through out 5 Accounting year

every year amortizing amount = 500000*1/5 = 100000

charged to Profit and Loss A/c besides yearly Interest on Bonds.