Final answer:
The journal entry for issuing 11.5%, 15-year bonds by Garcia Company on January 1 includes debiting Cash for $423,900, crediting Bonds Payable for $360,000, and crediting Premium on Bonds Payable for $63,900. This reflects the bond's issuance at a 117 ¾% premium due to the current market interest rate of 9.5%.
Step-by-step explanation:
The student has asked how to prepare a journal entry for the issuance of bonds. Specifically, the scenario involves Garcia Company issuing 11.5%, 15-year bonds with a par value of $360,000 and semiannual interest payments. The bonds are sold at a premium due to the market interest rate being 9.5%, while the bonds' stated interest rate is 11.5%. The bonds' selling price is stated as 117 ¾, which means 117.75% of the par value.
Here's the journal entry for issuing the bonds on January 1:
Cash: $423,900 [(360,000 * 117.75%) = 423,900]
Bonds Payable: $360,000
Premium on Bonds Payable: $63,900 [(423,900 - 360,000) = 63,900]
With this journal entry, Garcia Company recognizes the receipt of cash from the sale of the bonds, the creation of a liability (Bonds Payable), and the premium that arises when bonds are sold for more than their par value.