A company sold $4,000,000 of 5%, 10-year bonds on January 1, 2018 when the yield

Question

A company sold $4,000,000 of 5%, 10-year bonds on January 1, 2018 when the yield (market) rate of interest was 6%. The bonds were sold for $3,702,450. The bonds pay interest on June 30 and December 31 each year.

Required:

a. Prepare the journal entry to record the issuance of the bonds on January 1, 2018.

b. Using the effective interest method prepare the journal entries to record the transactions on June 30 and December 31, 2018. Round your answers to the nearest dollar.

Please show all work with explanations.

Explanation / Answer

Journal entry :

No Date accounts & explanation debit credit a jan 1,2018 Cash 3702450 Discount on bonds payable 297550     Bonds payable 4000000 (To record issue bonds payable) b June 30, 2018 Interest expense (3702450*6%*6/12) 111074      Discount on bonds payable 11074      Cash (4000000*5%*6/12) 100000 (To record interest) b Dec 31,2018 Interest expense (3702450+11074)*6%*6/12 111406      Discount on bonds payable 11406     Cash 100000 (To reccord interest)

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