On January 1, 20x5, Becky Bishop Fashion Company issued ten-year, 8 percent bonds with a face...

Question:

On January 1, 20x5, Becky Bishop Fashion Company issued ten-year, 8 percent bonds with a face value of $500,000. The semiannual interest dates are June 30 and December 31. The bonds were issued for $437,740 to yield an effective annual rate of 10 percent. The accounting year ends on December 31. Prepare entries in journal form without explanations to record the bond issue on January 1, 20x5, and the payments of interest and amortization of discount on June 30 and December 31, 20x5. Use the effective interest method of amortization. Round answers to the nearest dollar.

Bonds:

Bonds are issued by companies in order to obtain capital. Investors lend money to a company through bonds in exchange for the company's promise to (1) repay the bond's principal value upon maturity and (2) pay interest. A bond may be issued at a premium, at a discount, or at face value depending on its attractiveness compared to other instruments on the market.

Answer and Explanation:

Date Account Debit Credit Clarification
January 1, 20x5 Cash $437,740 Record inflow of cash from issuance
Discount on Bonds Payable $62,260 Record amount received below face value ($500,000 - $437,740)
Bonds Payable $500,000 Record bonds at face value
June 30, 20x5 Interest Expense $21,887 Record interest expense according to effective interest method ($437,740 carrying value x 5% market rate)
Discount on Bonds Payable $1,887 Record amortization of discount ($21,887 - $20,000)
Cash $20,000 Record cash paid to investors for interest ($500,000 x 4%)
Dec. 31, 20x5 Interest Expense $21,981 Record interest expense according to effective interest method (($437,740 + $1,887) carrying value x 5% market rate)
Discount on Bonds Payable $1,981 Record amortization of discount ($21,981 - $20,000)
Cash $20,000 Record cash paid to investors for interest ($500,000 x 4%)

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