1On January 1, 20, Whitefeather Industries issued 300, $1,000 face value bond. T

Question

1On January 1, 20, Whitefeather Industries issued 300, $1,000 face value bond. The bonds have a five-year life and pay interest at the rate of 10%. Interest is paid semiannually on July 1 and January 1. The market rate on January 1 was 10%.

Required:

1. Calculate the issue price of the bonds and record the issuance of the bonds on January 1 2012.

2. Explain how the issue price would have been affected if the market rate of interest had been higher than 10%.

3. Prepare the journal entry to record the payment of interest on July 1, 2012.

4. Calculate the amount of interest accrued on December 31, 2012

Explanation / Answer

calculate the issuse price of the bonds and record the issuance of the bonds on january 1, 2012
Since the stated rate and market rate are the same, the bond would be issued at par.
Dr Cash $100,000
Cr Bonds payable $100,000

explain how the issue price would have been affected if the market rate of interest had been higher than 10%
If the market rate is higher than the stated rate, the bonds would be sold at a discount.

prepare the journal entry to record the payment of interest on july 1, 2012
Dr Interest payable $15,000
Cr Cash $15,000
(Assuming that the interest was accrued on June 30)

prepare the journal to record the accrual of interest on december 31, 2012
Dr Interest expense $15,000
Cr Interest payable $15,000

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