Question

Lincoln Company issued $ 90,000 of​ 10-year, 9 % bonds payable on January​ 1, 2018. Lincoln Company pays interest each January 1 and July 1 and amortizes discount or premium by the​ straight-line amortization method. The company can issue its bonds payable under various conditions.

Requirements
1. Journalize Anderson Company's issuance of the bonds and first semiannual interest payment assuming the bonds were issued at face value. Explanations are not required.
2. Journalize Anderson Company's issuance of the bonds and first semiannual interest payment assuming the bonds were issued at 92. Explanations are not required.
3. Journalize Anderson Company's issuance of the bonds and first semiannual interest payment assuming the bonds were issued at 103. Explanations are not required.
4. Which bond price results in the most interest expense for Anderson Company? Explain in detail.

Answer 1

1. Journalize Anderson Company's issuance of the bonds and first semiannual interest payment assuming the bonds were issued at face value. Explanations are not required.

Issuance of bonds:

Dr Cash 90,000

Cr Bonds payable 90,000

First coupon payment:

Dr Interest expense 4,050

Cr Cash 4,050

2. Journalize Anderson Company's issuance of the bonds and first semiannual interest payment assuming the bonds were issued at 92.

Issuance of bonds:

Dr Cash 82,800

Dr Discount on bonds payable 7,200

Cr Bonds payable 90,000

First coupon payment:

Dr Interest expense 4,410

Cr Cash 4,050

Cr Discount on bonds payable (= $7,200 / 20) 360

3. Journalize Anderson Company's issuance of the bonds and first semiannual interest payment assuming the bonds were issued at 103.

Issuance of bonds:

Dr Cash 92,700

Cr Bonds payable 90,000

Cr Premium on bonds payable 2,700

First coupon payment:

Dr Interest expense 3,915

Dr Premium on bonds payable (=$2,700 / 20) 135

Cr Cash 4,050

4. Which bond price results in the most interest expense for Anderson Company?

If the company sells its bonds at a price lower than face value (at a discount) it will receive less money for the bonds they owe. The discount that is recorded increases the amount of interest expense because even though the amount of cash paid doesn't change, the real interest is higher.

Step-by-step explanation:

issued $90,000 in 9% bonds payable, 10 year maturity, semi annual coupon.