On January 1, 2024, Universe of Fun issues $890,000, 9% bonds that mature in 20 years. The market interest rate for bonds of similar risk and maturity is 10%, and the bonds issue for $813,642. Interest is paid semiannually on June 30 and December 31.Problem 9-7A (Algo) Parts 2 & 32. & 3. Record the issuance of the bonds on January 1, the interest payments on June 30, and December 31, 2024. (If no journal entry is required for a particular transaction, select "No Journal Entry Required" in the first account field. Round your answers to the nearest dollar amount.)
Question
On January 1, 2024, Universe of Fun issues 813,642. Interest is paid semiannually on June 30 and December 31.Problem 9-7A (Algo) Parts 2 & 32. & 3. Record the issuance of the bonds on January 1, the interest payments on June 30, and December 31, 2024. (If no journal entry is required for a particular transaction, select "No Journal Entry Required" in the first account field. Round your answers to the nearest dollar amount.)
Solution
The journal entries for the transactions would be as follows:
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On January 1, 2024, when the bonds are issued:
Debit: Cash 890,000 Credit: Discount on Bonds Payable $76,358
This entry records the issuance of the bonds at a discount. The company receives cash of 890,000 is the face value of the bonds. The difference between the face value and the issue price is the discount on bonds payable.
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On June 30, 2024, for the semiannual interest payment:
Debit: Interest Expense 3,818 Credit: Cash $40,864
This entry records the interest expense for the period. The interest expense is calculated as the face value of the bonds times the market interest rate divided by the number of periods in a year (i.e., 890,000 * 9% / 2).
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On December 31, 2024, for the semiannual interest payment:
Debit: Interest Expense 3,818 Credit: Cash $40,864
This entry is the same as the one on June 30, 2024. The interest expense and the discount on bonds payable are the same. The cash paid is also the same.
Please note that the amounts are rounded to the nearest dollar.
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