Question

Garcia Company issues 12.0%, 15-year bonds with a par value of $460,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 10.0%, which implies a selling price of 113 1/4.

Prepare the journal entry for the issuance of these bonds for cash on January 1.

Answer 1

Garcia Company issues bonds at a premium, resulting in a journal entry that debits Cash for $521,950 and credits Bonds Payable for $460,000 and Premium on Bonds Payable for $61,950.

Step-by-step explanation:

The question asks for the journal entry for the issuance of bonds by Garcia Company. The bonds have a stated interest rate of 12.0%, a par value of $460,000, and a market rate of 10.0% with a selling price of 113 1/4 (or 113.25%). When issuing bonds at a premium (above 100%), the company will receive more cash than the face value of the bonds because the stated interest rate (12%) is higher than the market rate (10%). The cash received can be calculated as $460,000 x 113.25% = $521,950. The semiannual interest payment is calculated as Par Value x (Stated Interest Rate / 2), which is $460,000 x (12% / 2) = $27,600 every six months.

The journal entry on January 1 for issuing these bonds is:

• Debit Cash $521,950
• Credit Bonds Payable $460,000
• Credit Premium on Bonds Payable $61,950