Lorance Corporation issued $420,000, 9%, 20-year bonds on January 1, 2017, for $

Question

Lorance Corporation issued $420,000, 9%, 20-year bonds on January 1, 2017, for $384,243. This price resulted in an effective-interest rate of 10% on the bonds. Interest is payable annually on January 1. Lorance uses the effective-interest method to amortize bond premium or discount.

A) Prepare the journal entry to record the issuance of the bonds.

B) Prepare the journal entry to record the accrual of interest and the discount amortization on December 31, 2017.

C) Prepare the journal entry to record the payment of interest on January 1, 2018.

Explanation / Answer

(A) Journal Entry to record Issuance of Bond

Cash...............................................Dr $384,243

Discount on Bonds Payable.......Dr $ 35,757

To Bonds Payable $420,000

(B) Journal Entry to Record Accrual of Interest

Interest Expense......................Dr $38,424.3 (10% of Book Value $384,243)

To, Discount on Bonds Payable $ 624.3 (Balancing Figure)

To, Interest Payable $37,800 ($420,000*9%)

(C) Journal Entry to record payment of Interest

Interest Payable............Dr $37,800

To, Cash $37,800

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