Question

Entries for issuing and calling bonds; loss Hoover Corp., a wholesaler of music equipment, issued $10,000,000 of 20-year, 5% callable bonds on March 1, 2042, at their face amount, with interest payable on March 1 and September 1. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions:

20Y2

Mar. 1 Issued the bonds for cash at their face amount.
Sept. 1 Paid the interest on the bonds.

20Y4

Sept. 1 Called the bond issue at 102, the rate provided in the bond indenture. (Omit entry for payment of interest.)
If an amount box does not require an entry, leave it blank.
Issued the bonds for cash at their face amount.
20Y2 Mar. ____, ____ ____,____
____, ____ ____, ____

Answer 1

Hoover Corp. issued $10,000,000 of 20-year, 5% callable bonds at face value and made a semi-annual interest payment. The journal entry for the bond issuance debits Cash and credits Bonds Payable by the face value amount. Upon calling the bonds, the bondholders received a 2% premium above the face value.

Step-by-step explanation:

When a company such as Hoover Corp. issues bonds, it is essentially borrowing money from investors who become bondholders. On March 1, 20Y2, Hoover Corp. issued $10,000,000 of 20-year, 5% callable bonds at face value. The interest on these bonds is paid semi-annually, on March 1 and September 1.

The journal entries for the issuance and interest payment are as follows:

• March 1, 20Y2 (Issuance of bonds):
• Debit Cash $10,000,000
• Credit Bonds Payable $10,000,000

• September 1, 20Y2 (Interest payment):
• Debit Interest Expense $250,000
• Credit Cash $250,000

The calculation for the interest payment is based on the face value of the bonds ($10,000,000) multiplied by the annual interest rate (5%), and then divided by two to account for the semi-annual payment.

In 20Y4, the bonds were called at 102, which means that the bondholders were paid 2% above the face value as a premium to compensate for the early redemption of their investment.