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
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