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On July 1, 2014, Bobby’s Building Corp. issued $1,000,000 of 10% bonds dated July 1, 2014 for $937,229. The bonds were sold to yield a market rate of 11% and pay interest semiannually on July 1 and January 1. Bobby’s Building Corp. uses the effective interest method of amortization. The company’s fiscal year ends on February 28. Required (Round all amounts to the nearest dollar): Prepare the journal entry to issue the bonds on July 1, 2014. Omit explanations for all journal entries. Prepare the amortization table for the first two interest periods. Prepare the journal entry on January 1, 2015.
Expert Answer
Answer:
1
| Date | Account titles | Debit | Credit |
| July 1,2014 | Cash A/c………………….dr | $937,229 | |
| Discount on bonds payable (1000,000-937229)……………dr | $62,771 | ||
| To Bonds payable | $1,000,000 |
2
Here we have been provided that use the effective interest method for amortization. Bond are sold to yield 11% return for the year so for 6 month it is
=11% * (1/2)
=5.5%
with this details we prepare the table for amortization as under
| Date | Interest payments | Interest expense |
Discount amortization | Discount balance | Bond carrying value |
| July1,2014 | $62,771 | $937,229 | |||
| Jan1,2015 | $50,000 | $51,548 | $1,548 | $61,223 | $938,777 |
| Explanation | (1,000,000×5%) | (937,229×5.5%) | (51,548-50000) | (62771-1548) | (937229+1548) |
| July1,2015 | $50,000 | $51,633 | $1,633 | $59,590 | $940,410 |
| Explanation | (938777×5.5%) | (51,663-50000) | (61223-1633) | (938777+1633) |
3
| Date | Account titles | Debit $ | Credit $ |
| Jan1,2015 | Interest expense A/c…………..dr | $51,548 | |
| To Discount on bonds payable | $1,548 | ||
| To Cash | $50,000 |
