# Question & Answer: 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 rat…..

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.

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