Question

On January 1, Renewable Energy issues bonds that have a $20,000 par value, mature in eight years, and pay 12% interest semiannually on June 30 and December 31. Prepare the journal entry for issuance assuming the bonds are issued at (a) 99 and (b) 103½. How much interest does the company pay (in cash) to its bondholders every six months if the bonds are sold at par?

Answer 1

When Renewable Energy issues bonds at a $20,000 par value, the semiannual interest payment is $1,200. Bonds issued at 99 or 103.5 would require different cash amounts and journal entries but maintain the same interest payment.

Step-by-step explanation:

To address the question on bond issuance and interest payments: when Renewable Energy issues bonds at a par value of $20,000 with a maturity of eight years at 12% annual interest paid semiannually, the interest payment every six months would be $1,200 (which is $20,000 × 12% ÷ 2).

For part (a) issuance at 99, the journal entry on issuance would be:
Debit Cash $19,800 (99% of $20,000)
Credit Bonds Payable $20,000

For part (b) issuance at 103.5, the journal entry would be:
Debit Cash $20,700 (103.5% of $20,000)
Credit Bonds Payable $20,000
Credit Premium on Bonds Payable $700

If the bonds were sold at par, the cash interest payment remains the same, which is $1,200 every six months.