Question

On May 1, 2021, Vaughn Manufacturing purchased $1,555,000 of 12% bonds, interest payable on January 1 and July 1, for $1,406,500 plus accrued interest. The bonds mature on January 1, 2027. Amortization is recorded when interest is received by the straight-line method. (Assume bonds are available for sale.)

Prepare the journal entry for May 1, 2021.

Answer 1

May 1, 2021

Dr. Bond receivables $1,555,000

Cr. Discount on the bond $148,500

Cr. Cash $1,406,500

Step-by-step explanation:

The bond is issued on discount when the bond issuance proceeds are less than the face value of the bond. The discount is expensed over the bond period until maturity. It is added to the interest expense value to expense it.

Sale Proceeds = $1,406,500

Discount on the bond = Face value - cash proceeds = $1,555,000 - $1,406,500 = $148,500

This Discount will be amortized over the bond's life till maturity and added to interest expense.