Question

Exercise 10-3 Recording bond issuance and interest LO P1 On January 1, Boston Enterprises issues bonds that have a $1,750,000 par value, mature in 20 years, and pay 10% interest semiannually on June 30 and December 31. The bonds are sold at par. 1. How much interest will Boston pay (in cash) to the bondholders every six months? 2. Prepare journal entries to record (a) the issuance of bonds on January 1, (b) the first interest payment on June 30, and (c) the second interest payment on December 31. 3. Prepare the journal entry for issuance assuming the bonds are issued at (a) 97 and (b) 103.

Answer 1

1. $87,500 is the interest payable every six months.

[ $1,750,000 * 10% * (6/12) ]

2. a) 1st january - Cash a/c Dr.    $1,750,000

To Bonds payable a/c $1,750,000

(Issued bonds at par value)

b) 30th june - Bond interest expense a/c Dr. $87,500

To Cash a/c $87,500

(interest on bonds paid semiannually)

c) 31st December - Bond interest expense a/c Dr. $87,500

To cash a/c $87,500

(interest on bonds paid semiannually)

3.  Here, there is no information is given regarding the face value per share or the number of shares. So, assume the number of shares as 17,500 ($1,750,000 / 100 ) and face value per share is $100.

a) Cash a/c Dr. $1,697,500

(17,500 * 97)

Discount on bonds payable a/c Dr. $52,500

($1,750,000 - $1,697,500)

To Bonds payable a/c $1,750,000

(issue of bonds at discount)

b) Cash a/c Dr. $1,802,500

(17,500 * 103)

   To Premium on bonds payable a/c $52,500

($1,802,500 - $1,750,000)

To Bonds payable a/c $1,750,000

(issue of bonds at premium)