On January 1, 2014, Powell Corporation issued $600,000, 5%, 5-year bonds dated J

Question

On January 1, 2014, Powell Corporation issued $600,000, 5%, 5-year bonds dated January 1, 2014, at 95. The bonds pay annual interest on January 1. The company uses the straight-line method of amortization and has a calendar year end.

Prepare all the journal entries that Powell Corporation would make related to this bond issue through January 1, 2015. Be sure to indicate the date on which the entries would be made

Date Account Titles and Explanation Debit Credit January 1, 2014 To record sale of bonds at a discount) December 31, 2014 To record annual accrued bond interest and amortization of bond discount) January 1, 2015 To record payment of bond interest liability)

Explanation / Answer

Journal entry for the issue of bond:

Price of the bond = face value x price %

                                   = 600,000 x 95%

                                    = 570,000

Discount on issue of bond = face value – price

                                                    = 600,000 -570,000

                                                    = 30,000

Date

Account titles

Debit

Credit

1-Jan-14

Cash

570000

Discount on issue of bond

30000

    Bonds payable

600000

To record bond interest

Annual discount amortization = discount/ no. of years

                                                           = 30,000/ 5

                                                           = 6000

Coupon amount = FV x coupon rate

                                = 600,000x5%

                                = 30,000

Date

Account titles

Debit

Credit

31-Dec-14

Interest expense

36000

   Discount on issue of bond

6000

Interest payable

30000

Payment of interest liability

Date

Account titles

Debit

Credit

1-Jan-15

Interest payable

30000

      Cash

30000

Date

Account titles

Debit

Credit

1-Jan-14

Cash

570000

Discount on issue of bond

30000

    Bonds payable

600000

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