Question

On January 1, 2017, Boston Enterprises issues bonds that have a $3,400,000 par value, mature in 20 years, and pay 9% interest semiannually on June 30 and December 31. The bonds are sold at par.

Required:
1. How much interest will Boston pay (in cash) to the bondholders every six months?
2. Prepare journal entries to record (a) the issuance of bonds on January 1, 2017: (b) the first interest payment on June 30, 2017; and (c) the second interest payment on December 31, 2017 3.
3. Prepare the journal entry for issuance assuming the bonds are issued at (a) 98 and (b) 102.

Answer 1

Answer:

1. Par Value = $3,400,000

Semi-annual coupon rate = 9%/2 = 4.5%

Semi annual coupon = Semiannual rate * Par value = 4.50$*$3,400,000

= $153,000

So, the interest that Boston will pay (in cash) to the bondholders every six months is $153,000

2. Date          Account Titles and Explanation    Debit      Credit

Jan 1, 2017     Cash                                           $3,400,000

                              Bonds payable                                     $3,400,000

                     (To record the issuance of bonds)

Jun 30, 2017  Interest expenses                      $153,000

                              Cash                                                       $153,000

                      (To record the first interest payment)

Dec 31, 2017  Interest expenses                      $153,000

                              Cash                                                       $153,000

                      (To record the second interest payment)

3. S/n  Account Titles                                  Debit              Credit

    a    Cash (3,400,000*98%)                   $3,332,000

          Discount on Bonds payable           $68,000

                 Bonds payable                                                 $3,400,000

    b    Cash (3,400,000*102%)                   $3,468,000

                 Premium on bonds payable                            $68,000

                 Bonds payable                                                 $3,400,000