Question

A company issues 5%, 12-year bonds with a face amount of $70,000 for $64,070 on January 1, 2021. The market interest rate for bonds of similar risk and maturity is 6%. Interest is paid semiannually on June 30 and December 31.

Required:
Record the bond issue and first interest payment on June 30, 2021.

Answer 1

Date Particular Debit Credit

Jan 1, 2021 Cash $64,700

Discount on bond payable $5,930

Bond payable $70,000

Jun 30,2021 Interest expense $3,882

Discount on bonds payable $2,132

Cash $1,750

Workings:

Semi annual interest payment = 70,000 x 5% x 6/12

= $1,750

Interest expense on June 30, 2021 = Carrying value of bonds x Market interest rate

= 64,700 x 6%

= $3,882

Discount on bonds payable amortized on June 30, 2021 = Interest expense - Interest payment

= 3,882 - 1,750

= $2,132