Answer:
Boston Enterprises
1. Bond Interests every six months:
Interest = $1,900,000 x (6%/2)= $57,000
2. Journal entries:
a) Issuance of bonds on January 1:
Debit Cash Account with $1,900,000
Credit Bonds Payable with $1,900,000
To record the issue of bonds at par value, 20 years' maturity at 6% semiannually.
b) First Interest Payment on June 30:
Debit Interest Expense with $57,000
Credit Cash Account with $57,000
To record payment of interest.
c) Second Interest Payment on December 31:
Debit Interest Expense with $57,000
Credit Cash Account with $57,000
To record payment of interest.
3. Journal Entries for issuance of bonds:
a) at $98,
Debit Cash Account with $1,862,000
Debit Bonds Discount with $38,000
Credit Bonds Payable with $1,900,000
To record the issue of bonds at $98 (discount).
b) at $102
Debit Cash Account with $1,938,000
Credit Bonds Payable with $1,900,000
Credit Bonds Premium with $38,000
To record the issue of bonds at $102 (premium).
Step-by-step explanation:
a) Bond interest: Since the bond's interest of 6% are paid semiannually, the effective interest rate is 3% (6%/2). The interest payment would be $57,000 every six months. This is equal to 3% of $1,900,000.
b) Bonds are sold at a discount when the market interest rate exceeds the coupon rate of the bond. The purpose of issuing at a discount is to make the bonds attractive vis-a-vis the market interest rate. The bondholders will then benefit from the interests and being repaid at the par value.
c) Bonds are sold at a premium when the coupon rate of the bond exceeds the market interest rate. This yields more for the issuer. The bondholders benefit from the interest payments.