Worthington Company issued $1,000,000 face value, six-year, 10% bonds on July 1,

Question

Worthington Company issued $1,000,000 face value, six-year, 10% bonds on July 1, 2012, when the market rate of interest was 12%. Interest payments are due every July 1 and January 1. Worthington uses a calendar year-end.

1.) Prepare the journal entry to record the issuance of the bonds on July 1, 2012.

2.) Prepare the adjusting journal entry on December 31, 2012, to accrue interest expense.

3.) Prepare the journal entry to record the interest payment on January 1, 2013.

4.) Calculate the amount of cash that will be paid for the retirement of the bonds on the maturity date.

Explanation / Answer

Answer:1

Journal entry as on July 1, 2012:

Cash Dr. 916200

To discount on bonds payable 83800

To bonds payable..................1000000

(to record issuance of bonds)

Working note:

Payment = 1000000*10%*6/12 = 50000 (because payments are made twice in a year)

Cash = 50000* PVIFA (6%, 12) + 1000000*PVIF(6%,12)

Answer: 2

Journal entry as on December 31, 2012:

Interest expense (916200*6%) Dr. 54972

To interest payable.....................................50000

To bonds payable........................................4972

Answer:3

Journal entry as on January 1, 2013:

Interest payable Dr. 50000

To cash...........................50000

Answer:4

On the maturity date, the balance in the discount on bonds payable will have been reduced to zero.The only remaining amount to be paid is the principle on the bond as shown in the bonds payable account 1000000.

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