Question

On January 1, 2018, Sunrise Corporation issued $4,000,000 face value, 8% coupon, 5-year bonds dated January 1, 2018, for $3,800,000 (market interest rate of 9.3%). The bonds pay annual interest on January 1. Instructions Prepare all the journal entries that Sunrise Corporation would make related to this bond issue through January 1, 2019, using effective interest rate method. Be sure to indicate the date on which the entries would be made.

Answer 1

Sunrise Corporation

Journal Entries:

January 1, 2018:

Debit Cash $3,800,000

Debit Discounts on Bonds $200,000

Credit 8% Bonds Payable $4,000,000

To record the issuance of bonds at a discount.

December 31, 2019:

Debit Interest Expense $353,400

Credit Interest Payable $320,000

Credit Amortization of discounts $33,400

To record the interest expense and first amortization of discounts.

January 1, 2019:

Debit Interest Payable $320,000

Credit Cash $320,000

To record the payment of the first interest.

Step-by-step explanation:

a) Data and Calculations:

Face value of bonds issued = $4,000,000

Coupon interest rate = 8%

Market interest rate = 9.3%

Maturity period = 5 years

Interest payment = Annual on January 1

Issue price = $3,800,000

Discounts = $200,000 ($4,000,000 - $3,800,000)

January 1, 2018:

Cash $3,800,000 Discounts on Bonds $200,000 8% Bonds Payable $4,000,000

December 31, 2019:

Interest Expense $353,400

Interest Payable $320,000

Amortization of discounts $33,400 ($353,400 - $320,000)

Value of bond on December 31, 2018 or January 1, 2019 = $3,833,400 ($3,800,000 + $33,400)

January 1, 2019:

Interest Payable $320,000 Cash $320,000