Question

Journalizing bond issuance and interest payments

On June 30, Daughtry Limited issues 8%, 20-year bonds payable with a face value of$130,000. The bonds are issued at 86 and pay interest on June 30 and December 31.

Requirements

1. Journalize the issuance of the bonds on June 30.

2. Journalize the semi-annual interest payment and amortization of bond discount on December 31.

Short answer

1. The cash account and discount on bonds payable are debited with $111,800, and $18,200.The bonds payable account is credited with $130,000.
2. The interest expenses debited by $5,495. The discount on bonds payable and cash is credited by $295 and $5,200.

Step-by-step solution

Journal entry of the issue of bond

Date	Particulars	Debit	Credit
June 30	Cash	$111,800
	Discount on Bonds Payable	$18,200
	8% Bonds Payable		$130,000
	(To record the issue of the bond)

Calculation of cash received on issue of bond and interest expenses:

$\begin{array}{c}\mathrm{Issue}\mathrm{Price}=\mathrm{Par}\mathrm{Value}\times \frac{\mathrm{\$}86}{100}\\ =\mathrm{\$}130,000\times \frac{\mathrm{\$}92}{100}\\ =\mathrm{\$}111,800\end{array}$

$\begin{array}{c}\mathrm{Discount}\mathrm{on}\mathrm{Bonds}\mathrm{Payable}=\mathrm{Par}\mathrm{Value}-\mathrm{Issue}\mathrm{Price}\\ =\mathrm{\$}130,000-\mathrm{\$}111,800\\ =\mathrm{\$}18,200\end{array}$

Payment of interest and amortization of discount

Date	Particulars	Debit	Credit
December 31	Interest Expense	$5,495
	Discount on Bonds Payable		$295
	Cash		$5,200
	(To record the semi-annual payment and amortization of discount)

$\begin{array}{c}\mathrm{Coupon}\mathrm{Amount}=\mathrm{Par}\mathrm{Value}\times \mathrm{Coupon}\mathrm{Rate}\times \mathrm{Time}\mathrm{Period}\\ =\mathrm{\$}130,000\times 8\mathrm{\%}\times \frac{6}{12}\\ =\mathrm{\$}5,200\end{array}$

$\begin{array}{c}\mathrm{Discount}\mathrm{Amortize}=\frac{\mathrm{Discounton}\mathrm{Bonds}\mathrm{Payable}}{\text{Semi-annualPeriod}}\\ =\frac{\mathrm{\$}11,800}{20\times 2}\\ =\mathrm{\$}295\end{array}$

$\begin{array}{c}\mathrm{Interest}\mathrm{Expenses}=\mathrm{Discount}\mathrm{On}\mathrm{Bond}\mathrm{Amortized}+\mathrm{Coupon}\mathrm{Amount}\\ =\mathrm{\$}295+\mathrm{\$}5,200\\ =\mathrm{\$}5,495\end{array}$