Journal Entries of Long-term bonds

Question

Mike Company issued a $5,000,000 of 8%,10-year bonds on January 1, 2014 for $4,731,582. The market or effective interest rate is 9%. Interest is paid annually on each January 1st, and the effective-interest method of amortization is to be used.

a. Provide the journal entry to record issuance of these long-term bonds.

b. Provide the end of the year adjusting journal entry (for Dec. 31, 2014) to record accrued Interest Expense for this bond (using the effective-interest method of amortization)

c. Provide the journal entry required on Jan. 1, 2015, when the interest is paid.

d. What is the balance of the Discount on Bond Payable Account?

e. What is the Bond Carrying Value that would appear on Mike's 12/31/14 Balance Sheet?

Answer 1

Answer 8-a                                        

Journal entry to record issuance of long-term bonds                      

Journal 

Date     Account Titles                                                 Debit                   Credit

Jan.1,2014         Cash                                               $4,731,582           

                              Discount on Bonds Payable        $268,418             

                                                                              Bonds Payable                 $5,000,000

                                               

Answer 8-b                                        

Journal entry to record end of year adjustment to record accrued interest expense

Journal 

Date     Account Titles                                                 Debit                   Credit

Dec.31,2014       Interest Expense                            $425,842             

                              Discount on Bonds Payable        $25,842

                                                              Interest Payable                              $400,000

                                               

Answer 8-c                                         

Journal entry to record payment of interest                       

Journal 

Date     Account Titles                                 Debit                                   Credit

Jan.1,2015          Interest Payable              $400,000             

                                                         Cash                                                    $400,000

Answer 8-d                        

Discount on bonds Payable                        Debit                    

Jan.1,2014          Bond Payable                  $268,418                             

Less:     Discount on Bonds Payable amortized in 2014 $25,842

Jan.1,2015          Balance b/d       $242,576

Balance in Discount on bond payable as on Dec.31,2014 = $2,42,576

               

Answer 8-e                        

Bond Carrying value that would appear on Mike's 31.12.2014 Balance sheet

Bond Book value             $5,000,000

Less: Discount on bond payable $242,576

Bond Carrying Value as on 31.12.14        $4,757,424