Question

Prepare the journal entries for the issuance of the bonds in both 1 and 2. Assume that both bonds are issued for cash on January 1, 2013.
1. Enviro Company issues 8%, 10-year bonds with a par value of $250,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 10%, which implies a selling price of 87 1/2. The straight-line method is used to allocate interest expense.
2. Garcia Company issues 10%, 15-year bonds with a par value of $240,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 8%, which implies a selling price of 117 1/4 . The effective interest method is used to allocate interest expense.

Answer 1

Answer:

Explanation:

The journal entries are shown below:

1. Cash A/c Dr $218,750       ($250,000 × 0.875)

Discount on bonds payable A/c $31,250

     To Bonds payable A/c 250,000

(Being bond is issued at a discount is recorded)

2. Cash A/c Dr $281,400     ($240,000 × 1.1725)

           To Premium on bonds payable A/c $41,400

           To Bonds payable A/c 240,000

(Being bond is issued at a discount is recorded)