On January 1, Boston Enterprises issues bonds that have a $1,900,000 par value, mature in 20 years, and pay 6% interest semiannually on June 30 and December 31. The bonds are sold at par. 1. How much interest will Boston pay (in cash) to the bondholders every six months? 2. Prepare journal entries to record (a) the issuance of bonds on January 1, (b) the first interest payment on June 30, and (c) the second interest payment on December 31. 3. Prepare the journal entry for issuance assuming the bonds are issued at (a) 98 and (b) 102.

Question

Business

Davion Huber

20 December, 18:42

On January 1, Boston Enterprises issues bonds that have a $1,900,000 par value, mature in 20 years, and pay 6% interest semiannually on June 30 and December 31. The bonds are sold at par. 1. How much interest will Boston pay (in cash) to the bondholders every six months? 2. Prepare journal entries to record (a) the issuance of bonds on January 1, (b) the first interest payment on June 30, and (c) the second interest payment on December 31. 3. Prepare the journal entry for issuance assuming the bonds are issued at (a) 98 and (b) 102.

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Peter Yang · Answer 1

Boston Enterprises

1. Bond Interests every six months:

Interest = $1,900,000 x (6%/2) = $57,000

2. Journal entries:

a) Issuance of bonds on January 1:

Debit Cash Account with $1,900,000

Credit Bonds Payable with $1,900,000

To record the issue of bonds at par value, 20 years' maturity at 6% semiannually.

b) First Interest Payment on June 30:

Debit Interest Expense with $57,000

Credit Cash Account with $57,000

To record payment of interest.

c) Second Interest Payment on December 31:

Debit Interest Expense with $57,000

Credit Cash Account with $57,000

To record payment of interest.

3. Journal Entries for issuance of bonds:

a) at $98,

Debit Cash Account with $1,862,000

Debit Bonds Discount with $38,000

Credit Bonds Payable with $1,900,000

To record the issue of bonds at $98 (discount).

b) at $102

Debit Cash Account with $1,938,000

Credit Bonds Payable with $1,900,000

Credit Bonds Premium with $38,000

To record the issue of bonds at $102 (premium).

Explanation:

a) Bond interest: Since the bond's interest of 6% are paid semiannually, the effective interest rate is 3% (6%/2). The interest payment would be $57,000 every six months. This is equal to 3% of $1,900,000.

b) Bonds are sold at a discount when the market interest rate exceeds the coupon rate of the bond. The purpose of issuing at a discount is to make the bonds attractive vis-a-vis the market interest rate. The bondholders will then benefit from the interests and being repaid at the par value.

c) Bonds are sold at a premium when the coupon rate of the bond exceeds the market interest rate. This yields more for the issuer. The bondholders benefit from the interest payments.