Question

The Gorman Group issued $900,000 of 13% bonds on June 30, 2021, for $967,707. The bonds were dated on June 30 and mature on June 30, 2041 (20 years). The market yield for bonds of similar risk and maturity is 12%. Interest is paid semiannually on December 31 and June 30.

Required:
1. Record the company's journal entry.

Answer 1

The Journal entries are as follows:

(i) On June 30,

Cash A/c Dr. $967,707

To Bonds payable $900,000

To premium on bonds payable $67,707

(To record the issuance)

(ii) On December 31,

Interest expense A/c Dr. $58,062.4

Premium on bonds payable A/c Dr. $437.6

To cash $58,500

(To record the interest on December 31, 2021)

Notes:

Interest expense = $967,707 × 6%

= $58,062.4

Cash = $900,000 × 6.5%

= $58,500

(iii) On June 30,

Interest expense A/c Dr. $58,036.2

Premium on bonds payable A/c Dr. $463.8

To cash $58,500

(To record the interest on June 30, 2022)

Notes:

Interest expense = ($967,707 - $438) × 6%

= $58,036.2

Cash = $900,000 × 6.5%

= $58,500