Osage Corporation issued $600,000, 7%, 10-year bonds on January 1, 2010, for $55

Question

Osage Corporation issued $600,000, 7%, 10-year bonds on January 1, 2010, for $559,740. This price resulted in an effective interest rate of 8% on the bonds. Interest is payable annually on January 1. Osage uses the effective-interest method to amortize bond premium or discount.

Prepare the journal entries to record: (Round answers to 0 decimal places, e.g. 2,500. List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.)

(a) The issuance of the bonds.



Date Account/Description Debit Credit
Jan. 1 CashAccounts receivableBonds payableMortgage note payableDiscount on bonds payableBond interest payablePremium on bonds payableBond interest expenseLoss on bond redemptionGain on bond redemption
Discount on bonds payableCashAccounts receivableBonds payableMortgage note payableBond interest payablePremium on bonds payableBond interest expenseLoss on bond redemptionGain on bond redemption
Bonds payableCashAccounts receivableMortgage note payableDiscount on bonds payableBond interest payablePremium on bonds payableBond interest expenseLoss on bond redemptionGain on bond redemption


(b) The accrual of interest and the discount amortization on December 31, 2010.



Date Account/Description Debit Credit
Dec. 31 Bond interest expenseCashAccounts receivableBonds payableMortgage note payableDiscount on bonds payableBond interest payablePremium on bonds payableLoss on bond redemptionGain on bond redemption
Bond interest payableCashAccounts receivableBonds payableMortgage note payableDiscount on bonds payablePremium on bonds payableBond interest expenseLoss on bond redemptionGain on bond redemption
Discount on bonds payableCashAccounts receivableBonds payableMortgage note payableBond interest payablePremium on bonds payableBond interest expenseLoss on bond redemptionGain on bond redemption


(c) The payment of interest on January 1, 2011.



Date Account/Description Debit Credit
Jan. 1 Bond interest payableCashAccounts receivableBonds payableMortgage note payableDiscount on bonds payablePremium on bonds payableBond interest expenseLoss on bond redemptionGain on bond redemption
CashAccounts receivableBonds payableMortgage note payableDiscount on bonds payableBond interest payablePremium on bonds payableBond interest expenseLoss on bond redemptionGain on bond redemption

Explanation / Answer

(a) The issuance of the bonds. Dr Cash 668,886 Dr Discount on Bonds Payable 48,114 Cr Bonds Payable 717,000 (b) The accrual of interest and the discount amortization on December 31, 2010. 668,886 carrying value of bonds x 8% market rate = $53,511 interest expense 717,000 x 7% = 50,190 cash interest payable 53,511 - 50,190 = 3,321 discount amortization Dr Bond Interest Expense 53,511 Cr Interest Payable 50,190 Cr Discount on Bonds Payable 3,321 (c) The payment of interest on January 1, 2011. Dr Interest Payable 50,190 Cr Cash 50,190

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