Question

Issuing Bonds at Face Amount On January 1, the first day of the fiscal year, Designer Fabric Inc. issues a $3,000,000, 8%, 10-year bond that pays semiannual interest of $120,000 ($3,000,000 x 8% x ½ year), receiving cash of $3,000,000. Journalize the entry to record (a) the issuance of the bonds. If an amount box does not require an entry, leave it blank.(b) the first interest payment on June 30, and(c) the payment of the principal on the maturity date.

Answer 1

Answer:

• (a) the issuance of the bonds.

Dr Cash $3,000,000  

Cr Bonds Payable  $3,000,000

• (b) the first interest payment on June 30,

Dr Bond Interest Expense ($3,000,000 x 8% x 6M /12M)  $120,000  

Cr Cash  $120,000

• (c) the payment of the principal on the maturity date.

Dr Bond Interest Expense ($3,000,000 x 8% x 6M/12M) $120,000  

Dr Bonds Payable $3,000,000  

Cr Cash  $3,120,000

Explanation:

On January 1, at the moment of the issuance, the entry to accounting is:

Dr Cash $3,000,000  

Cr Bonds Payable  $3,000,000

We recognize the money in the Cash account and the Liability during the next 10 year.

As the company makes the payment of interest semiannually, at the time of each interest payment, the company must record the interest expenses and cash flow.

Dr Bond Interest Expense ($3,000,000 x 8% x 6M /12M)  $120,000  

Cr Cash  $120,000

At the maturity date the company records the last interest expenses and the  paid of principal with a Debit to Bonds Payable account to compensate the Credit registered at the moment of the issuance.

Dr Bond Interest Expense ($3,000,000 x 8% x 6M/12M) $120,000  

Dr Bonds Payable $3,000,000  

Cr Cash  $3,120,000