On January 2, 2007, a company issued $100,000 of 5%, 10-year bonds. The bonds will mature in ten...

Question:

On January 2, 2007, a company issued $100,000 of 5%, 10-year bonds. The bonds will mature in ten years. The bonds were sold for 95% (or .95 of par) and will pay interest semi-annually, or twice a year, on June 30 and Dec 31.

Record the journal entries to record the issuance of the bonds and the interest payments to be made for the year 2007.

Long-Term Debt

This is a debt reported as non-current liabilities in the balance sheet as the settlement date is more than a year. It can be in a form of bonds, loans and mortgages.

Answer and Explanation:

The bonds are issued at a discount, it was sold below par value

1) To record for the issuance of bonds at 95

Accounts Debit Credit
Cash (100,000 x 95%) 95,000
Discount on Bonds Payable 5,000
Bonds Payable 100,000

2) To record the interest payment for the year 2007

June 30

Accounts Debit Credit
Interest Expense (See below computation) 5,250
Discount on Bonds Payable 250
Cash 5,000

To get the total interest payment

Interest Expense (100,000 x 5%) 5,000
Amortization of Discount on Bonds Payable (5,000 / 20 interest payments) 250
Total interest payment 5,250

Dec 31 payment

Accounts Debit Credit
Interest Expense 5,250
Discount on Bonds Payable 250
Cash 5,000

Learn more about this topic:

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Long-Term Debt: Definition, Cost & Formula

from Financial Accounting: Help and Review

Chapter 8 / Lesson 7
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