Question

Coffman Company sold bonds with a face value of $985,000 for $594,994. The bonds have a coupon rate of 2 percent, mature in 7 years, and pay interest semiannually every June 30 and December 31. All of the bonds were sold on January 1 of this year. Using a discount account, record the sale of the bonds on January 1 and the payment of interest on June 30 of this year. Coffman uses the effective-interest amortization method. Assume an annual market rate of interest of 10 percent.

a) Record the sale of the bonds on January 1st

b) Record the payment of interest on June 30th using effective interest amortization

Answer 1

Journal entry :

Date	account and explanation	debit	credit
Jan 1	Cash	594994
	Discount on bonds payable	390006
	Bonds payable		985000
	(To record bond issue)
June 30	Interest expense (594994*10*6/12)	29749.70
	Discount on bonds payable		19899.70
	cash (985000*1%)		9850
	(To record payment of interest)