Question

Paulson Company issues 6%, four-year bonds, on December 31, 2017, with a par value of \(200,000 and semiannual interest payments. Use the following bond amortization table and prepare journal entries to record

(a) the issuance of bonds on December 31, 2017;

(b) the first interest payment on June 30, 2018; and

(c) the second interest payment on December 31, 2018

Semiannual Period-End	Unamortized Discount	Carrying Value
12/31/2017	\) 13,466	\( 186,534
6/30/2018	\) 11,782	\( 188,218
12/31/2018	\) 10,098	$ 189,902

Short answer

(a) Journal entry is recorded in Step 3.

(b) Journal entry is recorded in Step 4.

(c) Journal entry is recorded in Step 5.

Step-by-step solution

Calculation of discount on bonds payable

$\begin{array}{rcl}\mathbf{Discount}\mathbf{}\mathbf{on}\mathbf{}\mathbf{Bond}\mathbf{}\mathbf{payable}& \mathbf{=}& \mathbf{Par}\mathbf{}\mathbf{value}-\mathbf{Issue}\mathbf{}\mathbf{price}\\ & \mathbf{=}& \mathbf{\$}\mathbf{200}\mathbf{,}\mathbf{000}-\mathbf{\$}\mathbf{186}\mathbf{,}\mathbf{534}\\ & \mathbf{=}& \mathbf{\$}\mathbf{13}\mathbf{,}\mathbf{466}\\ & & \end{array}$

:Calculation of total bond interest expense

Eight payments of $6,000 (8 pymts × [$200,000 × 0.06 × 1∕2 yr]	$ 48,000
Plus Discount	$ 13,466
Total bond interest expense	$ 61,466
Bond interest expense ($61,466 / 8)	$7,683.25

:(a) Journal entry for issuance of bonds on December 31,2017

Date	Account and explanation	Debit	Credit
December 31, 2017	Cash	$186,534
	Discount on Bonds Payable	$13,466
	Bonds Payable		$200,000
	Sold bonds for cash at a discount on their issue date.

:(b) Journal entry for first interest payment

Date	Account and explanation	Debit	Credit
June 30, 2018	Bond Interest Expense	$7,684
	Discount on Bonds Payable		$1,684
	Cash		$6,000
	(Pay semi-annual interest and record amortization)

:(c) Journal entry for second interest payment

Date	Account and explanation	Debit	Credit
Dec. 31, 2018	Bond Interest Expense	$7,684
	Discount on Bonds Payable		$1,684
	Cash		$6,000
	(Pay semi-annual interest and record amortization)