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Journal Entries for Bond Transactions

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On May 1, 2010, Medellin Corp. purchased $450,000 of 12% bonds, interest payable on January 1 and July 1, for $422,800 plus accrued interest. The bonds mature on January 1, 2016. Amortization is recorded when interest is received by the straight-line method (by months and round to the nearest dollar). (Assume bonds are available for sale.)

Instructions

(a) Prepare the entry for May 1, 2010.
(b) The bonds are sold on August 1, 2011 for $425,000 plus accrued interest. Prepare all entries required to properly record the sale.

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Solution Preview

Solution A - Journal Entry for 1st May

Debit 12% Bonds - 450,000
Debit Accured Interest - 18,000
Credit Cash - 440,800 ...

Solution Summary

The solution prepares journal entries for bond transactions.

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Journal entries - bond transactions

January 1 Issued 10-year bonds payable of $1,000,000 at 98. The bonds have a stated interest rate of 6% and pay interest semi-annually on July 1 and January 1.
July 1 Made first semi-annual interest payment to bondholders and amortized discount.
December 31 Accrued interest and amortized discount.

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