Question

On January 1, 2020, Indigo Corporation issued $687,000 of 8% bonds that are due in 10 years. The bonds were issued for $735,820 and pay interest each July 1 and January 1. The company uses the effective interest method. Assume an effective rate of 7%.

(a)

Prepare Indigo Corporation’s journal entry for the January 1 issuance. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Date	Account Titles and Explanation	Debit	Credit
Jan. 1	cash	735820
	Bonds payable		735820

Prepare the company’s journal entry for the July 1 interest payment. (Round answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Date	Account Titles and Explanation	Debit	Credit
July 1	bonds payable	1726
	interest expense	25754
	cash		27480

List of Accounts

• Accumulated Depreciation - Buildings
• Accumulated Depreciation - Equipment
• Accumulated Depreciation - Machinery
• Allowance for Doubtful Accounts
• Bad Debt Expense
• Bond Interest Payable
• Bonds Payable
• Buildings
• Cash
• Common Shares
• Cost of Goods Sold
• Depreciation Expense
• Equipment
• FV-NI Investments
• FV-OCI Investments
• Gain on Disposal of Buildings
• Gain on Disposal of Equipment
• Gain on Disposal of Machinery
• Gain on Redemption of Bonds
• Gain on Restructuring of Debt
• Gain on Sale of Investments
• Interest Expense
• Interest Income
• Interest Payable
• Interest Receivable
• Inventory
• Investment Property
• Land
• Loss on Disposal of Machinery
• Loss on Redemption of Bonds
• Loss on Retirement of Bonds
• Loss on Restructuring of Debt
• Loss on Sale of Investments
• Machinery
• Modification Gain or Loss
• Mortgage Payable
• No Entry
• Notes Payable
• Notes Receivable
• Sales Revenue
• Unearned Revenue
• Unrealized Gain or Loss
• Unrealized Gain or Loss - OCI

(c)

Prepare the company’s December 31 adjusting entry. (Round answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Date	Account Titles and Explanation	Debit	Credit
Dec. 31

Answer 1

Credit Debit $ 735,820 No. Date Account Titles and Explanation a) 01-01-2020 Cash Premium on bonds payable ($735,820-$687,000) Bonds payable (To record the issue of bonds payable) $ 48,820 $ 687,000 b) 01-07-2020 Interest expense ($735,820*7%*6/12) Premium on bonds payable ($27,480-$25,754) Cash ($687,000*8%*6/12) (To record the interest expense) $ 25,754 $ 1,726 $ 27,480 c) $ 25,693 $ 1,787 31-12-2020 Interest expense [($735,820 - $1,726)* 7%*6/12] Premium on bonds payable ($27,480-$25,693) Bond Interest payable ($687,000*8%*6/12) (To record the interest expense) $ 27,480