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A company issued $15,000,000 of 8% debentures on May 1, 2017 and received cash totaling...

Question:

A company issued $15,000,000 of 8% debentures on May 1, 2017 and received cash totaling $13,308,942.

a. The bonds pay interest semiannually on May 1 and November 1.

b. The maturity date on these bonds is November 1, 2025.

c. The firm uses the effective-interest method of amortizing discounts and premiums.

d. The bonds were sold to yield an effective interest rate of 10%. Using the attached T-account template, prepare the following transactions:

5/1/17: Bond issuance

10/31/17: Accrual of interest and amortization of bond discount/premium

11/1/17: Interest payment

4/30/18: Accrual of interest and amortization of bond discount/premium

5/1/18: Interest payment

Debenture:

Debentures are the document issued to borrow money for the long term from the market. It is a form of legally binding contract that binds company and investor. Company pays interest for the money borrowed from the investor.

Answer and Explanation:

Journal Entries

Date Particular Debit Credit
May 1, 2017 Cash a/c--------------------------------------Dr 13308942 -
- Discount on issue of bond a/c----------------------Dr 1691058 -
- To 8% Debenture a/c - 15000000
- (Being debenture issued on discount) - -
October 31, 2017 Interest expense a/c------------------------------Dr 705691 -
- To Interest Payable a/c - 600000
- To Discount on issue of bond a/c (1691058/16) - 105691
- (Being interest due) - -
November 1, 2017 Interest payable a/c----------------------------Dr 600000 -
- To Cash a/c - 600000
- (Being Interest paid to debenture holders) - -
April 30, 2018 Interest expense a/c--------------------------------Dr 705691 -
- To Interest payable a/c - 600000
- To Discount on issue of bond a/c - 105691
- (Being interest due) - -
May 1, 2018 Interest payable a/c----------------------------Dr 600000 -
- To Cash a/c - 600000
- (Being Interest paid to debenture holders) - -

Learn more about this topic:

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Sources of Long-Term Financing

from Business 100: Intro to Business

Chapter 23 / Lesson 4
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