Question

On January 1, the first day of the fiscal year, Designer Fabric Inc. issues a $1,000,000, 6%, 10-year bond that pays semiannual interest of $30,000 ($1,000,000 x 6% x ½ year), receiving cash of $1,000,000.

Journalize the entries to record (a) the issuance of the bonds, (b) the first interest payment on June 30, and (c) the payment of the principal on the maturity date of December 31 on page 11. Refer to the Chart of Accounts for exact wording of account titles.

CHART OF ACCOUNTSDesigner Fabric Inc.General Ledger
ASSETS
110 Cash
111 Petty Cash
121 Accounts Receivable
122 Allowance for Doubtful Accounts
126 Interest Receivable
127 Notes Receivable
131 Merchandise Inventory
141 Office Supplies
191 Land
194 Office Equipment
195 Accumulated Depreciation-Office Equipment
LIABILITIES
210 Accounts Payable
221 Salaries Payable
231 Sales Tax Payable
232 Interest Payable
241 Notes Payable
251 Bonds Payable
252 Discount on Bonds Payable
253 Premium on Bonds Payable
EQUITY
311 Common Stock
312 Paid-In Capital in Excess of Par-Common Stock
315 Treasury Stock
321 Preferred Stock
322 Paid-In Capital in Excess of Par-Preferred Stock
331 Paid-In Capital from Sale of Treasury Stock
340 Retained Earnings
351 Cash Dividends
352 Stock Dividends
390 Income Summary
REVENUE
410 Sales
610 Interest Revenue
611 Gain on Redemption of Bonds
EXPENSES
510 Cost of Merchandise Sold
515 Credit Card Expense
516 Cash Short and Over
522 Office Salaries Expense
531 Advertising Expense
532 Delivery Expense
533 Repairs Expense
535 Rent Expense
536 Insurance Expense
537 Office Supplies Expense
541 Bad Debt Expense
562 Depreciation Expense-Office Equipment
590 Miscellaneous Expense
710 Interest Expense
711 Loss on Redemption of Bonds

Answer 1

(a) Issuance of Bonds:

Debit: Cash (110) - $1,000,000

Credit: Bonds Payable (251) - $1,000,000

(b) First Interest Payment on June 30:

Debit: Interest Expense (710) - $30,000

Credit: Cash (110) - $30,000

(c) Payment of Principal on December 31:

Debit: Bonds Payable (251) - $1,000,000

Credit: Cash (110) - $1,000,000

Step-by-step explanation:

(a) Issuance of Bonds:

When Designer Fabric Inc. issues the bonds on January 1, the entry reflects an increase in Cash (110) and Bonds Payable (251) on the balance sheet. The company receives $1,000,000 in cash from the bond issuance.

(b) First Interest Payment on June 30:

On June 30, the company records the first semiannual interest payment. Interest Expense (710) increases, representing the cost of borrowing, and Cash (110) decreases by the amount paid, which is $30,000 in this case.

(c) Payment of Principal on December 31:

On the maturity date, December 31, Designer Fabric Inc. pays back the principal amount of the bond. The Bonds Payable (251) account decreases by $1,000,000, and Cash (110) decreases by the same amount, reflecting the repayment of the bond principal.

These entries follow standard accounting principles and ensure the accurate representation of the financial transactions related to the bond issuance, interest payments, and repayment of the principal.