Question

E14-3 (L01) (Entries for Bond Transactions) Presented below are two independent situations.

1. On January 1, 2017, Simon Company issued \(200,000 of 9%, 10-year bonds at par. Interest is payable quarterly on April 1, July 1, October 1, andJanuary 1.

2. On June 1, 2017, Garfunkel Company issued \)100,000 of 12%, 10-year bonds dated January 1 at par plus accrued interest. Interest is payable semi-annually on July 1 and January 1.

Instructions

For each of these two independent situations, prepare journal entries to record the following.

(a) The issuance of the bonds.

(b) The payment of interest on July 1.

(c) The accrual of interest on December 31.

Short answer

The bond is issued at$200,000

(b) On July 1, interest is paid on 9% bonds is$4,500 and on 12% bonds is$6,000.

(c) On Dec 31, the accrued interest on 9% bonds payable is$4500and on 12% bonds payable is$6,000.

Step-by-step solution

Meaning of Journal Entry

The journal entry means the business's day-to-day transactions are recorded in the books of accounts at the end of the accounting period.

Preparation of journal entries for Company Simon

Simon Company

Journal entries

Date	Account and explanation	Debit ($)	Credit ($)
Jan 1, 2017	Cash	200,000
	Bonds payable		200,000
	(To bonds are issued)
July 1, 2017	Interest expense	4,500
	Cash		4,500
	(To interest expense paid)
Dec 31, 2017	Interest expenses	4,500
	Interest payable		4,500
	(To record interest payable)

Preparation of journal entries for Company Garfunkel

Garfunkel Company

Journal entries

Date	Account and explanation	Debit ($)	Credit ($)
Jan 1	Cash	105,000
	Bonds payable		100,000
	Interest expense		5,000
	(To bonds are issued)
July 1	Interest expense	6,000
	Cash		6,000
	(To interest paid to the bond-holders)
Dec 31	Interest expenses	6,000
	Interest payable		6,000
	(To interest is payable on January 1, 2018, is recorded)

Working notes:

Calculation of quarterly interest

$\begin{array}{rcl}\mathrm{Quaterly}\mathrm{Interest}\mathrm{per}\mathrm{year}& =& \$200,000\times \frac{9}{100}\times \frac{1}{4}\\ & =& \$4500\mathrm{Per}\mathrm{quarter}\\ & & \end{array}$

Calculation of interest on bond

$\begin{array}{rcl}\mathrm{Interest}\mathrm{on}\mathrm{bond}& =& \$100,000\times \frac{12}{100}\times \frac{5}{12}\\ & =& \$5,000\end{array}$

Calculation of semi annual interest on bonds payable

$\begin{array}{rcl}\mathrm{Semi}-\mathrm{annual}\mathrm{Interest}& =& \$100,000\times \frac{12}{100}\times \frac{6}{12}\\ & =& \$6,000\end{array}$