Question

Dobbs Company issues 5%, two-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 through fourth interest payments on each June 30 and December 31; and (c) the maturity of the bonds on December 31, 2019.

Semiannual Period-End	Unamortized Discount	Carrying Value
12/31/2017	\) 12,000	\( 188,000
6/30/2018	\) 9,000	\( 191,000
12/31/2018	\) 6,000	\( 194,000
6/30/2019	\) 3,000	\( 197,000
12/31/2019	-	\) 200,000

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

$\begin{array}{rcl}\mathbf{Discounton}\mathbf{}\mathbf{Bond}\mathbf{}\mathbf{payable}& \mathbf{=}& \mathbf{Par}\mathbf{}\mathbf{value}-\mathbf{Issue}\mathbf{}\mathbf{Price}\\ & \mathbf{=}& \mathbf{\$}\mathbf{200}\mathbf{,}\mathbf{000}-\mathbf{\$}\mathbf{188}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{12}\mathbf{,}\mathbf{000}\\ & & \end{array}$

Calculation of interest expense per period

Four payments of $ 5,000 (4 pymts × [$200,000 × 0.05 × 1∕2 yr]	$ 20,000
Plus Discount	$ 12,000
Total bond interest expense	$ 32,000
Bond interest expense ($32,000 / 4)	$8000

:(a) Journal entry for the issuance of the bonds

Date	Account and explanation	Debit	Credit
December 31, 2017	Cash	$188,000
	Discount on Bonds Payable	$12,000
	Bonds Payable		$200,000
	Sold bonds for cash at a discount on their issue date.

(b) Journal entry for first to four interest payment

Date	Account and explanation	Debit	Credit
June 30, 2018	Bond Interest Expense	$8,000
	Discount on Bonds Payable		$3,000
	Cash		$5,000
	(Pay semi-annual interest and record amortization)
Dec. 31, 2018	Bond Interest Expense	$8,000
	Discount on Bonds Payable		$3,000
	Cash		$5,000
	(Pay semi-annual interest and record amortization)
June 30, 2019	Bond Interest Expense	$8,000
	Discount on Bonds Payable		$3,000
	Cash		$5,000
	(Pay semi-annual interest and record amortization)
Dec. 31, 2019	Bond Interest Expense	$8,000
	Discount on Bonds Payable		$3,000
	Cash		$5,000
	(Pay semi-annual interest and record amortization)

(c) Journal entry for maturity payment

Date	Account and explanation	Debit	Credit
Dec. 31, 2019	Bond Payable	$200,000
	Cash		$200,000
	Record maturity and payment of bonds.