Question

On January 1, 2020, Hollis Inc. issues $1,000,000 of 4.5% bonds, due in ten years, with interest payable annually on January 1. The bonds issue at $961,391, which resulted in an effective interest rate on the bonds of 5%.

Required:
Record the bond issue on January 1, 2020, the payment of interest on December 31, 2020, the payment of interest on December 31, 2021.

Answer 1

Step-by-step explanation:

The bond issue on January 1, 2020, the payment of interest on December 31, 2020, the payment of interest on December 31, 2021 are illustrated below:

January 1, 2020:

Debit Cash $961,391

Debit Discount on bonds payable $38609

Credit Bonds payable $1000000

(To record the issuance of bond)

December 31, 2020.

Debit Interest expense = $961,391 × 5% = $48070

Credit Discount on bonds payable = $3070

Credit Cash $1000000 × 4.5% = $45000

(To record the payment of interest)

December 31, 2021.

Debit Interest expense = $48223

Credit Discount on bonds payable = $3223

Credit Cash $1000000 × 4.5% = $45000

(To record the payment of interest)