Question

Rooney Corporation issued 3,520 8%, 9-year, $1,000 bonds dated January 1, 2014, at face value. Interest is paid each January 1.

(a) Prepare the journal entry to record the sale of these bonds on January 1, 2014.
(b) Prepare the adjusting journal entry on December 31, 2014, to record interest expense.
(c) Prepare the journal entry on January 1, 2015, to record interest paid.

Answer 1

To record the sale of the bonds on January 1, 2014, debit Cash for the total amount received and credit Bonds Payable for the face value of the bonds. To record interest expense on December 31, 2014, debit Interest Expense for the calculated amount and credit Bond Interest Payable. To record the payment of interest on January 1, 2015, debit Bond Interest Payable and credit Cash.

Step-by-step explanation:

(a) To record the sale of the bonds, we need to debit Cash for the total amount received from the sale, and credit Bonds Payable for the face value of the bonds. Since the bonds were sold at face value, there is no premium or discount involved in this transaction.

Journal entry:

• Debit: Cash (3,520 bonds x $1,000) = $3,520,000
• Credit: Bonds Payable (3,520 bonds x $1,000) = $3,520,000

(b) To record interest expense on December 31, 2014, we need to calculate the amount of interest expense for the year. The formula for calculating interest expense is:

Interest Expense = Face Value of Bonds x Interest Rate

Interest Expense = $1,000 x 8% = $80,000

Journal entry:

• Debit: Interest Expense = $80,000
• Credit: Bond Interest Payable = $80,000

(c) To record the payment of interest on January 1, 2015, we need to debit Bond Interest Payable and credit Cash for the amount of interest paid. Since the bonds were issued at face value, there is no premium or discount involved in this transaction.

Journal entry:

• Debit: Bond Interest Payable = $80,000
• Credit: Cash = $80,000