Question

Madrid Company plans to issue 8% bonds on January 1, 2017, with a par value of \(4,000,000. The company sells \)3,600,000 of the bonds at par on January 1, 2017. The remaining $400,000 sells at par on July 1, 2017. The bonds pay interest semiannually as of June 30 and December 31.

1. Record the entry for the first interest payment on June 30, 2017.

2. Record the entry for the July 1 cash sale of bonds.

Short answer

1.The amount of bond interest expense is $144,000

2.To record selling of bond, cash is debited and bonds payable is credited

Step-by-step solution

Meaning of Bond

Bonds refer to a written document issued by a company to raise funds for which the company pays interest to the bondholders and repays the borrowed amount after a specific period

Journalentry for the first interest payment on June 30, 2017

Date	Account and explanation	Debit ($)	Credit ($)
June 30, 2017	Bond Interest Expense	144,000
	Cash		144,000
	(To record interest payment)

Working note:

$\begin{array}{rcl}\text{Interest} \text{expense}& =& \$36,00,000\times 8\%\times \frac{6}{12}\\ & =& \$144,000\\ & & \end{array}$

Journalentry for the July 1 cash sale of bonds

Date	Account and explanation	Debit ($)	Credit ($)
July 30, 2017	Cash	400,000
	Bonds Payable		400,000
	(To sold bonds for cash at par)