Question

Gridley Company issued $800,000, 11%, 10-year bonds on December 31, 2019, for $730,000. Interest is payable annually on December 31. Gridley Company uses the straight-line method to amortize bond premium or discount. Prepare entries to record issuance of bonds, payment of interest, amortization of discount, and redemption at maturity. Instructions Prepare the journal entries to record the following. a. The issuance of the bonds. b. The payment of interest and the discount amortization on December 31, 2020. c. The redemption of the bonds at maturity, assuming interest for the last interest period has been paid and recorded.

Answer 1

To record the issuance of the bonds, Gridley Company debits Cash for $730,000 and Discount on Bonds Payable for $70,000, while crediting Bonds Payable for $800,000. For interest and amortization, Interest Expense is debited for $88,000 and Discount on Bonds Payable is debited for $7,000, with a corresponding credit to Cash of $88,000 and a credit to Interest Expense for $7,000. At maturity, Bonds Payable is debited for $800,000 and Cash is credited for the same amount.

Step-by-step explanation:

When Gridley Company issues bonds for less than their face value, it does so at a discount. The difference between the face value and the price at which the bonds are issued is recognized as a bond discount. Here are the journal entries required to record the issuance, interest payments, amortization of bond discount, and redemption at maturity:

a. Issuance of the bonds on December 31, 2019:

Dr Cash $730,000
Dr Discount on Bonds Payable $70,000
Cr Bonds Payable $800,000

b. Payment of interest and the discount amortization on December 31, 2020:

The total discount to be amortized over the bond's life is $70,000. Using the straight-line method over 10 years, the annual amortization is $7,000. The interest expense is $88,000 (11% of $800,000).

Dr Interest Expense $88,000
Cr Cash $88,000
Dr Discount on Bonds Payable $7,000
Cr Interest Expense $7,000

c. Redemption of the bonds at maturity:

The bonds are redeemed at their face value:

Dr Bonds Payable $800,000
Cr Cash $800,000

Answer 2

Gridley Company

Journal Entries:

a. The issuance of the bonds.

December 31, 2019:

Debit Cash Account $730,000

Debit Bonds Discount $70,000

Credit Bonds Payable $800,000

To record the issuance of 10-year bonds at 11%.

b. The payment of interest and the discount amortization on December 31, 2020.

Debit Interest Expense $88,000

Credit Cash Account $88,000

To record the payment of interest.

Debit Amortization Expense $7,000

Credit Bonds Discount $7,000

To record amortization of discount.

c. The redemption of the bonds at maturity, assuming interest for the last interest period has been paid and recorded.

Debit Bonds Payable $800,000

Credit Cash Account $800,000

To record the redemption of the bonds at maturity.

Step-by-step explanation:

a) Data and Calculations:

Bonds issued (face value) = $800,000

Cash Receipt (Discounted value) = $730,000

Discount value = $70,000

Bonds' duration = 10 years

Amortization of Discount = $7,000 ($70,000/10) under the straight-line method.

Interest rate = 11% annually ($88,000)