Question

Sunland Company issues $5,000,000, 10-year, 10% bonds at 96, with interest payable annually on January 1. The straight-line method is used to amortize bond discount.

A) Prepare the journal entry to record the sale of these bonds on January 1, 2020.

B) Prepare the adjusting journal entry to record interest expense and bond discount amortization on December 31, 2020.

Answer 1

The bonds are issued at 96.

$5,000,000 X 0.96 = $4,800,000

Discount = $200,000 (ie. $5,000,000 - $4,800,000)

Number of years for which the bonds are issued - 10 years

Discount amortisation per annum = $20,000 (ie. $200,000 / 10 years)

Interest payable every year = $500,000 (ie. $5,000,000 X 10%)

Date	Accounts	Debit	Credit
Jan 1, 2020	Cash	$4,800,000	-
	Discount on bonds payable	$200,000	-
	Bonds payable	-	$5,000,000
Dec 31, 2020	Interest expense	$520,000	-
	Discount on bonds payable	-	$20,000
	Cash	-	$500,000