Question

Problem 3 (20 points) Stevens Manufacturing Company obtained authorization to issue 10-year bonds with a face value of $5 million. The bonds are dated June 1, 2018 and have a contract rate of interest of 6 percent. They pay interest on December 1 and June 1. The bonds are issued on September 1, 2018, at 100 plus 3 months' accrued interest. Prepare the necessary journal entries in general journal form on: a. September 1, 2018, to record the issuance of the bonds. (5 points) b. December 1, 2018, to record the first semiannual interest payment on the bond issue. (5 points) C. December 31, 2018, to record interest expense accrued through year-end. (5 points) d. June 1, 2019, to record the second semiannual interest payment.(5 points) a

Answer 1

DATE	ACCOUNT TITLE AND EXPLANATION	DEBIT	CREDIT
a) Sep 1,2018	Cash a/c	$5,075,000
	Bonds Payable		$5,000,000
	Interest Payable		$75,000
	(Bond issued with Accrued Interest of 3 months)(See- Note 1)
b)Dec 1,2018	Interest Expense	$75,000
	Interest Payable	$75,000
	Cash		$150,000
	(Interest paid for for quarter ending Dec.,2018)(See- Note 2)
c)Dec 31,2018	Interest Expense	$25,000
	Interest Payable		$25000
	(Interest Accrued for 1 month)(See-Note 3)
d) June 1,2019	Interest Payable	$25,000
	Interest Expense	$125,000
	Cash		$150,000
	(Interest paid for quarter ending June,2019)(See - Note 4)

Note 1: Calculation of Accrued interest as on Sep 1, 2018:-

$5,000,000*6%*3/12 = $75,000

Note 2: Calculation of Interest for Quarter Ending Dec 1, 2018 for period of 6 months:

$5,000,000*6%*3/12 (Recorded on Sep 1,2018)+ $5,000,000*6%*3/12(Recorded on Dec 1,2018)

= $75,000+ $75,000

= $150,000

Note 3: Calculation of Interest for year Ending Dec 31, 2018 for period of 1 month:

$5,000,000*6%*1/12 = $ 25,000

Note 4: Calculation of Interest for Quarter Ending June 1, 2019 for period of 6 months:

$5,000,000*6%*5/12 (Recorded on June 1,2019)+ $5,000,000*6%*1/12(Recorded on Dec 31,2018)

= $ 125,000+$ 25,000

=$ 150,000