. On January 1, 2016, Logan Corporation sold $600,000 of 8% bonds at $570,000. T
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Question
. On January 1, 2016, Logan Corporation sold $600,000 of 8% bonds at $570,000. The bonds are due on January 1, 2021 and pay interest semiannually every July 1 and January 1. The bonds were sold to yield a 10% effective rate. Logan closes its books annually on December 31. Required:
(a) Prepare the general journal entry to record the sale of the bonds.
(b) Prepare the general journal entry to record the interest payment on July 1, 2016, assuming that Logan uses the effective interest method to amortize the bond discount.
(c) Prepare the general journal entry to record the interest accrual on December 31, 2016, assuming that Logan uses the effective interest method to amortize the bond discount.
Explanation / Answer
(a)
Journal Entry for the sale of bonds:
Date
Accounts Titles / Explanations
Debit
Credit
Jan. 1, 2016
Cash
$570,000
Discount on Bonds Payable (600000-570000)
$ 30,000
Bonds Payable
$600,000
(Being bonds issued on discount )
(b)
Journal Entry to record the interest payment on July 1, 2016:
Date
Accounts Titles / Explanations
Debit
Credit
July. 1, 2016
Interest expense
$ 28,500
Discount on Bonds Payable
$ 4,500
Cash (Interest paid)
$ 24,000
(Being semiannual interest paid on bonds)
Workings:
Carrying value of bonds as on Jan. 1, 2016
$570,000
Interest Expense = 570000*10% / 2 =
$ 28,500
Interest paid = 600000*8%/2=
$ 24,000
Amortization for bond discount = 28500-24000 =
$ 4,500
(c)
Journal Entry to record the interest payment on December 31, 2016:
Date
Accounts Titles / Explanations
Debit
Credit
July. 1, 2016
Interest expense
$ 28,725
Discount on Bonds Payable
$ 4,725
Cash (Interest paid)
$ 24,000
(Being semiannual interest paid on bonds)
Workings:
Carrying value of bonds as on Jan. 1, 2016 (570000+4500)
$574,500
Interest Expense = 574500*10% / 2 =
$ 28,725
Interest paid = 600000*8%/2=
$ 24,000
Amortization for bond discount = 28500-24000 =
$ 4,725
(a)
Journal Entry for the sale of bonds:
Date
Accounts Titles / Explanations
Debit
Credit
Jan. 1, 2016
Cash
$570,000
Discount on Bonds Payable (600000-570000)
$ 30,000
Bonds Payable
$600,000
(Being bonds issued on discount )
(b)
Journal Entry to record the interest payment on July 1, 2016:
Date
Accounts Titles / Explanations
Debit
Credit
July. 1, 2016
Interest expense
$ 28,500
Discount on Bonds Payable
$ 4,500
Cash (Interest paid)
$ 24,000
(Being semiannual interest paid on bonds)
Workings:
Carrying value of bonds as on Jan. 1, 2016
$570,000
Interest Expense = 570000*10% / 2 =
$ 28,500
Interest paid = 600000*8%/2=
$ 24,000
Amortization for bond discount = 28500-24000 =
$ 4,500
(c)
Journal Entry to record the interest payment on December 31, 2016:
Date
Accounts Titles / Explanations
Debit
Credit
July. 1, 2016
Interest expense
$ 28,725
Discount on Bonds Payable
$ 4,725
Cash (Interest paid)
$ 24,000
(Being semiannual interest paid on bonds)
Workings:
Carrying value of bonds as on Jan. 1, 2016 (570000+4500)
$574,500
Interest Expense = 574500*10% / 2 =
$ 28,725
Interest paid = 600000*8%/2=
$ 24,000
Amortization for bond discount = 28500-24000 =
$ 4,725
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