Accounting for Bonds Issued at a Discount:Issuance, Interest Payments, and Retirement
Mellilo Corporation issued $5million of 20-year, 9.5 percent bonds on July 1,2011, at 98. Interestis due onJune 30and December 31 ofeach year, and all of the bonds intheissue mature onJune 30, 2031. Mellilo’s fiscal year ends onDecember 31. Prepare the following journal entries:
a. July 1,2011,torecord the issuance of the bonds.
b. December 31, 2011, topay interest and amortize the bond discount.
c. June 30, 2031, to pay interest, amortize the bond discount, and retire the bonds at maturity(make. two separate entries).
d. Briefly explain the effect of a mortizing the bond discount upon (1) annual net income and (2) annual netcash flow from operating activities. (Ignore possible income tax effects.)
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