Question

Preparing Journal Entries to Record Issuance of Bonds at Face Value, Payment of Interest, and Early Retirement
On January 1, 2010, Innovative Solutions, Inc., issued $200,000 in bonds at face value. The bonds have a stated interest rate of 6 percent. The bonds mature in 10 years and pay interest once per year on December 31.
Required:
1. Prepare the journal entry to record the bond issuance.
2. Prepare the journal entry to record the interest payment on December 31, 2010. Assume no interest has been accrued earlier in the year.
3. Assume the bonds were retired immediately after the first interest payment at a quoted price of 102. Prepare the journal entry to record the early retirement of the bonds.

Answer 1

Answer:

Explanation:

The journal entries are shown below:

(1) Cash A/c Dr $200,000  

          To Bond payable A/c $200,000  

(Being bond is issued for cash)

(2) Interest expense A/c Dr $12,000       ($200,000 × 6%)

            To Interest payable A/c $12,000

(Being accrued interest adjusted)

(3) Bond payable A/c Dr $200,000

   Premium on retirement of bond A/c Dr $4,000

            To Cash A/c $204,000           ($200,000 × 102%)

(Being the early retirement of the bonds is recorded)