Question

Buchanan Company dates and sells 10-year bonds with a par value of $800,000 on Jan. 1, 2014, at 103 and it bears interest at an annual rate of 10% payable semiannually on Jan. 1 and July 1. What are the journal entries recorded in 2014?

Answer 1

Buchanan Company records a sale of bonds with a debit to cash and credits to bonds payable and premium on bonds payable. Throughout the year, interest expenses are recorded every six months with a debit to interest expense and a credit to cash.

Step-by-step explanation:

When Buchanan Company sells its 10-year bonds with a par value of $800,000 at 103, this means the bonds are sold at a 3% premium over their face value. Thus, Buchanan will receive more than the par value for the sale.

On Jan 1, 2014, the first journal entry to record the bond issuance would be:

• Debit Cash $824,000 (800,000 x 103%)
• Credit Bonds Payable $800,000
• Credit Premium on Bonds Payable $24,000 (which is the difference between cash received and the bonds payable, representing the premium)

Interest on the bonds is paid semiannually at a 10% annual rate, so every six months Buchanan pays 5% interest on the par value:

• Debit Interest Expense $40,000 (800,000 x 10% x 1/2)
• Credit Cash $40,000

This entry would be made twice in 2014, on Jan 1 and July 1, for each interest payment period.