Question

On January 1, 2015, Jackson Manufacturing issued $ 150,000 of 10%, 10-year bonds for $147,446. Interest is payable semiannually on June 30 and December 31. Using the given information, answer the following. Show all work for credit. (Round all answers to two decimal places as appropriate.)

Jackson is issuing these bonds at a (premium / discount)? (3 points)

How much interest does Jackson pay each year? (3 points)

Record the journal entry to account for the issuance of these bonds. (6 points)

Record the remaining journal entries in 2015 related to the bond issue. Assume that Jackson uses the straight-line method to account for amortization. (10 points)

Answer 1

Par Value of Bonds = $150,000
Issue Value of Bonds = $147,446

Discount on Bonds = Par Value of Bonds - Issue Value of Bonds
Discount on Bonds = $150,000 - $147,446
Discount on Bonds = $2,554

Time to Maturity = 10 years
Semiannual Period = 20

Semiannual Amortization of Discount = Discount on Bonds / Semiannual Period
Semiannual Amortization of Discount = $2,554 / 20
Semiannual Amortization of Discount = $128

Annual Coupon Rate = 10.00%
Semiannual Coupon Rate = 5.00%
Semiannual Coupon = 5.00% * $150,000
Semiannual Coupon = $7,500

Semiannual Interest Expense = Semiannual Coupon + Semiannual Amortization of Discount
Semiannual Interest Expense = $7,500 + $128
Semiannual Interest Expense = $7,628

Answer a.

Jackson is issuing these bonds at a discount.

Answer b.

Jackson will pay interest of $15,000 (2 * $7,500) each year.

Answer c.

Credit Date Jan. 01, 2015 Debit 147,446 2,554 150,000 June 30, 2015 7,628 General Journal Cash Discount on Bonds Payable Bonds Payable Interest Expense Discount on Bonds Payable Cash Interest Expense Discount on Bonds Payable Cash 128 7,500 Dec. 31, 2015 7,628 128 7,500