Question

On January 1, 2013, JWS Corporation issued $693,000 of 7% bonds, due in 10 years. The bonds were issued for $645,911, and pay interest each July 1 and January 1. JWS uses the effective interest method. Prepare the company's journal entries for

(a) the January 1 issuance,
(b) the July 1 interest payment, and
(c) the December 31 adjusting entry. Assume an effective interest rate of 8%. (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2. Round answers to zero decimal places, e.g. 2,510.)

Answer 1

Answer:

Explanation:

Calculation for A:

Jan 1

Outstanding Balance 645,911

Calculation for B:

July 1

Cash Interest Payment 693,000 *0.07 *6/12 = 24,255

Interest Expense 645,911 *0.08 *6/12 =25,836.44

Discount Amortized =25,836.44 - 24,255=1,581.44

Outstanding Balance 645,911 + 1,581.44 = 647,492.4

Calculation for C:

Dec 31

Cash Interest Payable 24,255

Interest Expense 647,492.44 *0.08 *6/12 = 25,899.696

Discount Amortized 1,644.693

Outstanding Balance 647,499.24 + 1,644.693 = 649137.096

Now, Journal entries:

(a)

Dr Cash 645,911

Dr Discount on Bonds Payable 47,089

       Cr Bonds Payable 693,000

(b)

Dr Interest Expense 25,836

        Cr Discount on Bonds Payable 1,581

        Cr Cash 24,255

(c)

Dr Interest Expense 225,899

     Cr Discount on Bonds Payable 1,644

     Cr Interest Payable 24,255