Exercise 10-8 On August 1, 2014, Ortega Corporation issued $704,400, 7%, 10-year
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Exercise 10-8
On August 1, 2014, Ortega Corporation issued $704,400, 7%, 10-year bonds at face value. Interest is payable annually on August 1. Ortega’s year-end is December 31.
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Exercise 10-8
On August 1, 2014, Ortega Corporation issued $704,400, 7%, 10-year bonds at face value. Interest is payable annually on August 1. Ortega’s year-end is December 31.
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Explanation / Answer
Journal entry for issuance of bonds on August 1:
Cash a/c (Dr) $ 704,400
Bonds Payable (Cr) $704,400
(Amount of cash received is debited and book value of bonds is credited).
Accrual of interest as on December 31:
Period = August 1 to December 31 = 5 months. Interest amount = interest %*704,400*5/12
= 7%*704,400*5/12 = $20,545
Entry will be:
Interest expense a/c (Dr) $20,545
Interest payable (Cr) $20,545
(The interest payable will be a current liability in Ortega's balance sheet).
As on August 1, 2015 full 1 year interest is payable in cash. Amount = 7% of 704,400 = $49,308
Of this amount, $20,545 has been already accounted as interest expenses. Balance amount = 49,308 - 20,545 = $28,763 will have to be accounted for.
Entry will be:
Interest expenses (Dr) 28,763
Interest payable (Dr) 20,545
Cash (Cr) 49,308
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