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.
Given information is:
Value of bonds issued = $800,000
Period = 20 years
Issue price of bond = $84.95 per bond
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 |
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 | ||
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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