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Question

Foreman Company issued $800,000 of 10%, 20-year bonds on January 1, 2020, at 84.95 to yield 12%. Interest is payable semiannually on July 1 and January 1.

Prepare the journal entries to record (a) the issuance of the bonds, (b) the payment of interest and related amortization on July 1, 2020, and (c) the accrual of interest and the related amortization on December 31, 2020.

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Expert Answer

Step 1

Given information is:

 Value of bonds issued = $800,000

Period = 20 years

Issue price of bond = $84.95 per bond

Step 2

Since bonds are issued at $84.95 per bond,

Cash received on issuance of bonds = 800,000*84.95% = $679,600

As issue price is less than the face value of bonds then Discount on bonds = 800,000 - 679,600 = $120400

Required journal entry for issuance of bonds is:

Date	Particulars	Debit ($)	Credit ($)
Jan 1, 2020	Cash	679600
	Discount on Bonds payable	120400
	Bonds payable (To record the issuance of bonds)		800000

Step 3

Interest expense will be charged at yield rate on issue price:

= 679600*12%*6/12 = $40776

But coupon interest will be paid at par value that is

= 800,000*10%*6/12 = $40,000

Required journal entry on July 1, 2020 will be:

Date	Particulars	Debit ($)	Credit ($)
July 1, 2020	Interest Expense	40776
	Discount on bonds payable		776
	Cash (To record payment of interest)		40000

Step 4

On December 31,

Interest Expense = (679600 + 776) *12% *6/12 = $40823

Interest payable = 800,000*10%*6/12 = $40,000

Required journal entry is:

Date	Particulars	Debit ($)	Credit ($)
Dec 31, 2020	Interest Expense	40823
	Discount on bonds payable		823
	Interest Payable (To record the semi annual interest)		40000

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