On 1 January 2015, Quiet Music Ltd issued 8,000 seven-year bonds with a face value of $100 and coupon rate of 4% per annum. The market rate was 3% on the date that the bonds were issued. The company received $849,843 cash from investors for the bonds.
Using the effective interest rate method, the company’s accountant has prepared the table showing how the bonds change in value over time:
Year
Opening balance
(1 Jan)
Effective Interest (market rate = 3%)
Interest to be Paid (coupon rate = 4%)
Decrease in carrying value
Closing balance
(31 Dec)
1*
$849,843
$25,495
$32,000
-$6,505
$843,338
2
$843,338
$25,300
$32,000
-$6,700
$836,638
3
$836,638
$25,099
$32,000
-$6,901
$829,737
4
$829,737
$24,892
$32,000
-$7,108
$822,629
5
$822,629
$24,679
$32,000
-$7,321
$815,308
6
$815,308
$24,459
$32,000
-$7,541
$807,767
7**
$807,767
$24,233
$32,000
-$7,767
$800,000
* Year 1 is 1 January 2015 to 31 December 2015
** Year 7 is 1 January 2021 to 31 December 2021
On 31 December 2021, interest and the face value of the bonds is paid to investors in cash.
Required:
Using the information provided in the above table, prepare the journal entries that would be recorded on 1 January 2015 and 31 December 2021.
Use the answer template below
Quiet Music Ltd’s General Journal:
Date
Account Names
Debit
Credit
1/1/2015
(To record issue of bonds to investors)
31/12/2021
(To record bond payment of interest and principal to investors)
