1. Assume that Cactus Construction Company offers to issue bonds on January 1st

Question

1. Assume that Cactus Construction Company offers to issue bonds on January 1st of next year with a $1,000,000 par value with a 8% annual interest rate (paid annually) and a 5 year life. Also assume the market rate is 9% for similar bonds. The exact issue price of these bonds is stated at 96.1103. The bonds are unsecured but registered to the name of the purchaser. Record the accounting entry, in General Journal format, at the date of issue.

2. Based upon the information given in question 1, record the accounting entry, in General Journal format, for the first interest payment and amortization of discount/premium.

Explanation / Answer

1. Journal Entry on the date of Issue :

The company has issued the Bonds at 96.1103. A cash inflow will be generated in exchange of Bonds hence the Cash A/c will be debited.

The Bonds have been issued on discount which is an expense for the company hence Discount on Issue of Bonds will debited in the books which will be amortized in the next years.

Bonds issued is a liability for the company which will be redeemed in future and an account of Bond Payable will be credited to be shown in Balance Sheet as liability.

therefore the entry will be:

Cash/Bank A/c Dr.                           9,61,103                       (1,000,000/100x96.1103)
Discount on Issue of Bonds A/c Dr.    38,897                          (1,000,000/100x3.8897)**
                 To Bond Payable A/c                     1,000,000

(Being Bonds issued on discount)

** Par value of bonds is 100; Issue price is 96.1103 hence discount per bond is 100-96.1103 = 3.8897

2. a) For Interest Payment

Interest is an expense for the company hence this will be debited and cash paid hence it will be credited.

Interest Expenses A/c Dr.    80,000             (1,000,000x8%)

            To Cash/Bank A/c               80,000

(Being Interest Paid on Bonds)

b) Amortization of Discount ( Assumed that the discount has been amortized in the next 5 years)

1/5th of Discount on Issue of Bonds will be transferred to Discount A/c this year, which will be transferred to Profit & Loss A/c

Discount A/c Dr.    7,779.40                        (38,897/5)

     To Discount on Issue of Bonds   7,779.40

( Being Discount on Issue of Bonds transferred to Discount A/c)

Soultion ends here.

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