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Bond transactions

On April 1, 2007, the Diamond Bottle Company sold $400,000 of long term bonds for $331,180. The bonds will mature in 10 years and have a stated interest rate of 9% and an effective yield rate of 12%. The bonds pay interest semi-annually on September 30 and March 31 of each year. The bonds are to be accounted for under the effective interest method. Diamond Bottle's fiscal year ends on December 31.

Instructions: (Show all calculations) ROUND ALL AMOUNTS TO NEAREST $

Date Credit Cash Interest Expense Bond Discount Carrying Amount of Bonds
4/1/07 331,180
9/30/07 $18,000 $19,871 ($1,871) $333,051
3/31/08 $18,000 $19,983 ($1,983) $335,034
9/30/08 $18,000 $20,102 ($2,102) $337,136
3/31/09 $18,000 $20,228 ($2,228) $339,364
9/30/09 $18,000 $20,362 ($2,362) $341,726
3/31/10 $18,000 $20,504 ($2,504) $344,229

A. Prepare the journal entry to record the issuance of the bonds.

B. Prepare the journal entry to record the payment of interest and the recording of interest expense for the first payment date.

C. Assuming all required interest payment have been made, prepare the adjusting journal entry to be made on December 31, 2008.

D. Show how the bonds would be shown on a Balance Sheet prepared as of December 31, 2008.

Solution Preview

A. Prepare the journal entry to record the issuance of the bonds.

The face value of the bonds is $400,000 and the issue price is $331,180. The bonds are issued at a discount and the amount of bond discount is 400,000-331,180 = $68,820. The journal entry is
Cash Dr 331,180
Discount on bonds payable Dr 68,820
Bonds Payable Cr 400,000

B. Prepare the journal entry to record the payment of interest and the recording of interest expense for the first payment ...

Solution Summary

The solution explains the journal entries and balance sheet presentation for bond transactions.

$2.19