On Jan 1, Joplin City issued 10% serial bonds at par to finance streetlights in

Question

On Jan 1, Joplin City issued 10% serial bonds at par to finance streetlights in an area recently incorporated in the city limits. The face amount of the bonds is $1,200,000; interest and principal is payable annually on January 1, and bonds are to be retired in equal amounts over 6 years from collections from assessments against property affected.

REQUIRED:

a. Record the journal entry at year end to recognize the matured portion of the bond and to recognize interest due

b. On Jan 1, year two, record the journal entry to pay the first year’s installment plus interest on the bond.

Explanation / Answer

Annual loan payment = Loan amount / PV annuity factor at 10%, 6years                                 = $1,200,000 / 4.355 Annual loan payment = $275,545 a. Journal entry at year end: Interest expense             120,000          Interest payable                120,000 (to record the accrued interest) Notes payable      $275,545              Cash                   $275,545 (To record the balance at the year end) b. Journal entry to pay the first year’s installment plus interest: Interest payable       $120,000 Note payable      275,545    Cash    $395,545 (to record 1st year interest and principal payment)

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