On January 1, 2020, XYZ Co. issued a bond with a face value of $400,000. The bond
Question:
On January 1, 2020, XYZ Co. issued a bond with a face value of $400,000. The bond is a 5-year bond and will mature on December 31, 2025. The bond has a contract interest rate of 5% and interest is paid semi-annually on June 30 and December 31 of each year. On January 1, 2020, the market interest rate for the bonds was 6%. The issue price of the bond was $382,942. The journal entry to record the issuance of the bond would be:
debit credit
Cash $382,942
Discount on B/P 17,058
Bonds Payable $400,000
REQUIRED:
Using the approach recommended by Professor A, prepare the journal entry to record the first interest payment on the XYZ Co. bond on June 30, 2020 using the straight-line method. (Show your work on each step using the recommended approach.)
The five-step approach recommended by Professor A:
- a. Calculate the amount of the interest payment (Interest = Principle X Rate X Time).
- b. Immediately credit in Cash the amount of the calculated interest payment.
- c. Fill in the account names for the rest of the journal entry. You will always have a charge to Bond Interest Expense. If B/P Discount was charged on the bond issue entry, you will have a credit for B/P Discount on this entry. If the B/P Premium was credited in the bond issue entry, you will have a debit to the B/P Premium in this entry.
- d. To determine the amount of credit to B/P Discount or debit to B/P Premium, divide the total discount or premium amount by the number of interest payments.
- e. To determine the amount of the debit to the Bond Interest Expense, PLUG IT IN (Enter Balance).
Intermediate accounting
ISBN: 978-0077647094
7th edition
Authors: J. David Spiceland, James Sepe, Mark Nelson