Question

On february 1, 2016, strauss-lombardi issued 9% bonds, dated february 1, with a face amount of $800,000. The bonds sold for $731,364 and mature on january 31, 2036 (20 years). The market yield for bonds of similar risk and maturity was 10%. Interest is paid semiannually on july 31 and january 31. Strauss-lombardi's fiscal year ends december 31. Required: 1. To 4. Prepare the journal entry to record their issuance by strauss-lombardi on february 1, 2016, interest on july 31, 2016 (at the effective rate), interest on january 31, 2017 and the adjusting entry to accrue interest on december 31, 2016. (do not round your intermediate and round your final answer to nearest whole dollar. If no journal entry is required for a transaction, select "no journal entry required" in the first account field. )

Answer 1

Step-by-step explanation:

1.To record the issuance of the bonds by Strauss-Lombardi on February 1, 2016:

Debit Credit

Cash $731,364

Bonds Payable $800,000

Discount on Bonds Payable $68,636

2.To record interest on July 31, 2016 (at the effective rate):

Debit Credit

Interest Expense $30,000

Interest Payable $30,000

3.To record interest on January 31, 2017:

Debit Credit

Interest Expense $30,000

Interest Payable $30,000

4.To accrue interest on December 31, 2016:

Debit Credit

Interest Expense $15,000

Interest Payable $15,000

Note: The effective rate was calculated as follows:

Effective rate = (1 + market yield/2)^2 - 1

= (1 + 10%/2)^2 - 1

= (1 + 5%)^2 - 1

= (1.05)^2 - 1

= 1.1025 - 1

= 10.25%

The interest payment on July 31, 2016 was calculated as:

Interest payment = face amount x effective rate x time period

= $800,000 x 10.25% x 1/2 year

= $30,000

The interest payment on January 31, 2017