On January 1, Renewable Energy issues bonds that have a $38,000 par value, mature in ten years, and pay 14% interest semiannually on June 30 and December 31. 1. Prepare the journal entry for issuance assuming the bonds are issued at (a) 99 and (b) 103½. 2. How much interest does the company pay (in cash) to its bondholders every six months if the bonds are sold at par?

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Business

Malik Morgan

2 June, 12:17

On January 1, Renewable Energy issues bonds that have a $38,000 par value, mature in ten years, and pay 14% interest semiannually on June 30 and December 31. 1. Prepare the journal entry for issuance assuming the bonds are issued at (a) 99 and (b) 103½. 2. How much interest does the company pay (in cash) to its bondholders every six months if the bonds are sold at par?

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Tate Blair · Answer 1

Renewable Energy

Journal Entries for the Issuance of Bonds:

a) at a discount:

Jan. 1:

Debit Cash $37,620

Debit Discount on Bonds $380

Credit 14% Bonds Payable $38,000

To record the issue of 10-year bonds at a discount.

June 30:

Debit Interest on Bonds $2,660

Credit Cash $2,660

To record the payment of semi-annual interest.

Dec. 31:

Debit Interest on Bonds $2,660

Credit Cash $2,660

To record the payment of semi-annual interest.

Dec. 31:

Debit Interest on Bonds $3.80

Credit Discount on Bonds $3.80

To amortize the discount on bonds for the year.

b) at a premium:

Debit Cash $39,330

Credit Premium on Bonds $1,330

Credit 14% Bonds Payable $38,000

To record the issue of 10-year bonds at a premium.

June 30:

Debit Interest on Bonds $2,660

Credit Cash $2,660

To record the payment of semi-annual interest.

Dec. 31:

Debit Interest on Bonds $2,660

Credit Cash $2,660

To record the payment of semi-annual interest.

Dec. 31:

Debit Premium on Bonds $133

Credit Interest on Bonds $133

To amortize the premium on bonds for the year.

2. If the bonds are sold at par, the interest in cash to the bondholders every six months is $2,660 ($38,000 x 14%) x 6/12.

Explanation:

Bonds can be issued at par, discount, or premium. They are issued at par when the rate of interest equals the market interest rate. They are issued at a discount when the rate of interest is less than the market interest rate. And they are issued at a premium when the rate of interest is more than the market rate.

Discounts and Premiums on Bonds can be accounted for in two ways: the straight-line method and the effective interest method. In this case, we have applied the straight-line method because of its simplicity. Based on the information provided, the effective interest method cannot be used.