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16 September, 02:31

On January 1, 2020, Novak Corporation issued $450,000 of 7% bonds, due in 8 years. The bonds were issued for $423,784, and pay interest each July 1 and January 1. Novak uses the effective-interest method. Prepare the company's journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry. Assume an effective-interest rate of 8%.

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  1. 16 September, 04:14
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    (a) the January 1 issuance

    Dr Cash 423,784

    Dr Discount on bonds payable 26,216

    Cr Bonds payable 450,000

    (b) the July 1 interest payment

    Dr Interest expense 16,951

    Cr Cash 15,750

    Cr Discount on bonds payable 1,201

    (c) the December 31 adjusting entry

    Dr Interest expense 16,999

    Cr Interest payable 15,750

    Cr Discount on bonds payable 1,249

    Explanation:

    a) the discount on bonds payable = $450,000 - $423,784 = $26,216

    b) to calculate total interest expense using the effective interest method:

    ($423,784 x 4%) - ($450,000 x 3.5%) = $16,951 - $15,750 = $1,201

    total interest expense = $16,951

    Dr Interest expense 16,951

    Cr Cash 15,750

    Cr Discount on bonds payable 1,201

    c) to calculate accrued interest on December 31

    bond's carrying value = $423,784 + $1,201 = $424,985

    ($424,985 x 4%) - ($450,000 x 3.5%) = $16,999 - $15,750 = $1,249

    Dr Interest expense 16,999

    Cr Interest payable 15,750

    Cr Discount on bonds payable 1,249
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