Question

Temple Company has $500,000 of 9% bonds that pay interest on June 30 and December 31 and have an authorization date of January 1, 2019. The company issues the bonds on March 1, 2019, at par, plus accrued interest.Prepare the journal entry to record the issuance of the bonds.

Answer 1

Answer:

Dr Cash ($500,000 * $103 / $100) $507,500

Cr Bond Payable                                           $507,500

Cr Bond premium                                          $7,500  

Explanation:

The bond was issued at 1st March and the interest due is at 31st of December which means that first 2 month interest has been accrued and thus requires journal entry to record:

Dr Interest Expense ($500,000 * 9% * 2/12)  $7,500

Cr Interest Payable                                                $7,500

At the issuance date, the price of the bond is $103 and this is the price that was received when the bond was issued, hence the cash collected would be:

Cash Collected = ($500,000 * $103 / $100) = $515,000

$7,500 would be the interest accrued which means:

Cash collected for bond = $515,000 -  $7,500 = $575,000

Now the entry would be:

Dr Cash ($500,000 * $103 / $100) $507,500

Cr Bond Payable                                           $507,500

Cr Bond premium                                          $7,500