Question

Required information [The following information applies to the questions displayed below.] On January 1, when the market interest rate was 9 percent, Seton Corporation completed a $290,000, 8 percent bond issue for $271,387. The bonds pay interest each December 31 and mature in 10 years. Assume Seton Corporation uses the effective interest method to amortize the bond discount. Required: 1. & 2. Prepare the required journal entries to record the bond issuance and the first interest payment on December 31. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field. Round your answers to the nearest whole dollar.)

Answer 1

Requirement 1:

Date	Account title and Explanation	Debit	Credit
January 1	Cash	$271,387
	Discount on bonds payable	$18,613
	Bonds payable		$290,000
	[To record issuance of bonds ]

Calculations:

Face value of the bonds payable	$290,000
Issue price	($271,387)
Discount on bonds payable	$18,613

Requirement 2:

Date	Account title and Explanation	Debit	Credit
December 31	Interest Expense	$24,425
	Discount on bonds payable		$1,225
	Cash		$23,200
	[To record payment of interest]

Calculations:

Interest expense = Carrying amount x Market rate = $271,387 x 9% = $24,425

Cash (interest payment) = Face value x Coupon rate = $290,000 x 8% = $23,200

Discount on bonds payable = Interest expense - Cash = $24,425 - $23,200 = $1,225