A company issued 25,000, 10-year, 5 percent, $100 bonds on January 1 at face val

Question

A company issued 25,000, 10-year, 5 percent, $100 bonds on January 1 at face value. Interest is payable each December 31.

(a)

The issuance of these bonds on January 1.

(b)

The first interest payment on December 31.

Indicate the effects of the amounts for the above transactions

Assets

=

Liabilities

+

Stockholders’ Equity

(a)

(b)

2.

Prepare the journal entries related for the above transactions.

a) The company issued 25,000, 10-year, 5 percent, $100 bonds on January 1 at face value. Interest is payable each December 31. Record the issuance of 25,000 bonds at face value for $100 each.

b) The company issued 25,000, 10-year, 5 percent, $100 bonds on January 1 at face value. Interest is payable each December 31. Record the interest payment on December 31.

A company issued 25,000, 10-year, 5 percent, $100 bonds on January 1 at face value. Interest is payable each December 31.

Explanation / Answer

1) Issuance of Bonds

Assets = Liabilities + Stock holder equity

Cash -2,500,000 = 10 year bonds - 2,500,000 + 0

2) Interest Payment

Assets = Liabilities + Equity

Cash- 2,375,000 = 10 year bonds - 2,500,000 + ( 125,000)

Interest amount = 2,500,000 * 5 / 100 = $ 125,000

Cash Remained after payment of interest = 2,500,000 - 125,000 = $ 2,375,000

Journal Entries

Issuance of Bonds

Cash                     debit $ 2,500,000

10 year 5% Bonds credit $ 2,500,000

Interest Payment

Interest expense debit $ 125,000

Cash                 credit $ 125,000

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