Question

IFRS14-3 On January 1, 2017, JWS Corporation issued \(600,000 of 7% bonds, due in 10 years. The bonds were issued for \)559,224, and pay interest each July 1 and January 1. Prepare the company's journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry. Assume an effective-interest rate of 8%.

Short answer

Answer

The discount on bond payable is $40,776

Step-by-step solution

Meaning of Bonds 

Bonds represent the money owed by the company to outsiders. They carry a fixed rate of interest, also known as the coupon rate.

Step 2: Showing Journal Entries 

Date	Particulars	Debit ($)	Credit($)
Jan-01	Cash ( Refer working note 1)	559,224
	Discount on Bond Payable	40,776
	Bond payable		600,000
	(To record issue of 7% bond at discount)
Jul-01	Interest Expense ( Refer working note 2)	22,369
	Discount on Bond Payable		1,369
	Cash		21,000
	(To record interest paid)
Dec-31	Interest Expense ( Refer working note 3)	22,424
	Discount on Bond Payable		1,424
	Interest Payable		21,000
	(To record adjustment entry at year end)

Working note 1:

• Bonds of $600,000 will be issued on January 1, 2017, at a discounted price of $559,224.
• Thus, the total amount of discount will be $40,776 ($600,000 - $559,224).

Working note 2:

Calculation of interest paid on 1 July 2017

$$\begin{gathered} \text{Interest} \text{paid}=\$6,00,000\times 7\%\times \frac{6}{12} \\ =\$21,000 \end{gathered}$$

Calculation of interest expense on 1 July 2017

$$\begin{gathered} \text{Interest} \text{expense}=\$559,224\times 8\%\times \frac{6}{12} \\ =\$22,369 \end{gathered}$$

Therefore, the discount on bond payable will be $1,369 ($22,369 - $21,000).

Working note 3:

Calculation of interest paid on 31 December 2017

$$\begin{gathered} \text{Interest} \text{paid}=\$6,00,000\times 7\%\times \frac{6}{12} \\ =\$21,000 \end{gathered}$$

Calculation of interest expense on 31December2017

$$\begin{gathered} \text{Interest} \text{expense}=\$560,593\times 8\%\times \frac{6}{12} \\ =\$22,424 \end{gathered}$$

Therefore, the discount on bond payable will be $1,424 ($22,424 - $21,000).