McGee Company issued $400,000 of 8%, 10-year bonds on January 1, 2017. Interest

Question

McGee Company issued $400,000 of 8%, 10-year bonds on January 1, 2017. Interest is payable semiannually on July 1 and January 1. Mcgee Company uses the effective interest method of amortization for bond premium or discount. Assume an effective yield of 6% in Pricing the bond.

Prepare the journal entries to record the following (round to the nearest dollar.)

The issuance of the bonds.

The payment of interest and related amortization July 1.

The accrual of interest and the related amortization on December 31

Explanation / Answer

Solution :

Computation of bond price Table values are based on: n= 20 i= 3% Cash flow Table Value Amount Present Value Par (Maturity) Value 0.55368 $400,000 $221,470 Interest (Annuity) 14.87747 $16,000 $238,040 Price of bonds $459,510

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