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…..

28, (14 points) On July 1, 2014, Bobbys 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. Bobbys Building Corp. use of amortization. The companys fiscal year ends on February 28. s the effective interest method Required (Round all amounts to the nearest dollar): 1. Prepare the journal entry to issue the bond s on July 1, 2014. Omit explanations for all journal entries. 2. Prepare the amortization table for the first two interest periods. 3. Prepare the journal entry on January 1, 2015. Date July 1, 2014 Account Debit redit Discount Discount Bond Carrying Interest Payment Interest Expense Amortization Balance Date Amount July 1, 2014 Jan. 1, 2015 uly 1, 2015 Account Debit Credit Date Jan. 1, 2015

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.

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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

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