Question

Presented below are two independent situations. 1. On January 1, 2017, Monty Company issued $216,000 of 8%, 10-year bonds at par. Interest is payable quarterly on April 1, July 1, October 1, and January 1. 2. On June 1, 2017, Flounder Company issued $168,000 of 12%, 10-year bonds dated January 1 at par plus accrued interest. Interest is payable semiannually on July 1 and January 1. For each of these two independent situations, prepare journal entries to record the following. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) (a) The issuance of the bonds. (b) The payment of interest on July 1. (c) The accrual of interest on December 31.

Answer 1

Answer:

MONTY

cash 216,000

  bond payable 216,000

interest expense 4,320

   cash                               4,320

interest expense 4,320

   interest payable            4,320

Flounder

cash 178,080

       bond payable 168,000

     interest payable 10,080

interest payable   10,080

   cash                              10,080

interest expense 10,080

   interest payable           10,080

Explanation:

Monty

issuance will receive the same amount as face value, as it was issued at par

July 1st payment: 216,000 x 8%/4 = 4,320

we divide by 4 as the payment are quarterly and there are 4 quarter per year

we recognize this interest expense and pay it.

accrued interest at December 31th:

we will recognize the interest accrued form october 1st to december 31th

we put a payable account as there is no cash payment

Flounder

issuance will receive the same amount as face value, and the interest accrued from Jan 1st to June 30th as the bonds were issued with delay

168,00 x 12%/2 = 10,080 interest payable

(the payment are semiannually so we split the rate in two)

The sum of these payable and the face value will be the cash proceeds to Flounder

july 1st payment

we "pay" the interest agains the payable account

accrued interest at December 31th:

168,00 x 12%/2 = 10,080 interest expense

we will recognize the nterest accrued form July 1st to december 31th

we put a payable account as there is no cash payment