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XYZ, Inc Long Term Bonds: Prepare journal entries for purchase, interest, amortization

Prepare journal entries to record the following transactions relating to long-term bonds of XYZ, Inc. (Show computations.)

(a) On June 1, 2006, XYZ, Inc. issued $600,000, 6% bonds for $587,640, which includes accrued interest. Interest is payable semiannually on February 1 and August 1 with the bonds maturing on February 1, 2016. The bonds are callable at 102.

(b) On August 1, 2006, XYZ, Inc. paid interest on the bonds and recorded amortization. XYZ, Inc. uses straight-line amortization.
(c) On February 1, 2008, XYZ, Inc. paid interest and recorded amortization on all of the bonds, and purchased $360,000 of the bonds at the call price. Assume that a reversing entry was made on January 1, 2008.

Solution Preview

(a) On June 1, 2006, XYZ, Inc. issued $600,000, 6% bonds for $587,640, which includes accrued interest. Interest is payable semiannually on February 1 and August 1 with the bonds maturing on February 1, 2016. The bonds are callable at 102.

The accrued interest is 600,000X6%X4/12 = 12,000 for 4 months from Feb to May. The amount received for bonds is 587,640-12,000=575,640 and so the discount is 600,000-575,640 = 24,360. The journal entry is
Cash Dr 587,640
Discount on Bonds Payable Dr 24,360
Bonds Payable ...

Solution Summary

The solution explains some journal entries relating to bond transactions

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