Question

On January 1, 2013, Boston Enterprises issues bonds that have a $1,750,000 par value, mature in 20 years, and pay 10% interest semiannually on June 30 and December 31. The bonds are sold at par.

1. How much interest will Boston pay (in cash) to the bondholders every six months?
(Par (maturity) Value)) x (Semianual Rate) = Semiannual Cash Interest Payment

2. Prepare journal entries for the following.
a) The issuance of bonds on january 1, 2013. (record the issue of bonds at par on January 1, 2013.
b) The first interest payment on June 30, 2013. (Do not round intermediate calculations)
c) The second interest payment on December 31, 2013. (Do not round intermediate calculations)

3. Prepare the journal entry for the issuance of bonds assuming.
a) The bonds are issued at 96. (Record the issue of bonds with a par value of $1,500,000 at 96 cash on January 1, 2013).
b) The bonds are issued at 104. (Record the issue of bonds with a par value of $1,500,000 at 104 cash on January 1, 2013).

Answer 1

Step-by-step explanation:

1. Semi-annual cash interest payment = Par value x Interest rate x 1/2

Semi-annual cash interest payment = 1,750,000 x 0.10 x 1/2

Semi-annual cash interest payment = $87,500

2. General Journal

Date Particulars Debit Credit

Jan.1, 2013 Cash 1,750,000

Bonds payable 1,750,000

Jun.30, 2013 Bond Interest Expense 87,500

Cash 87,500

Dec.31, 2013 Bond Interest Expense 87,500

Cash 87,500

3. General Journal

Date Particulars Debit Credit

Jan.1, 2013 Cash (1,500,000*0.96) 1,440,000

Discount 60,000

Bonds payable 1,500,000

Jan.1, 2013 Cash (1,500,000*1.04) 1,560,000

Premium 60,000

Bonds Payable 1,500,000