Answer:
Renewable Energy
Journal Entries for the Issuance of Bonds:
a) at a discount:
Jan. 1:
Debit Cash $37,620
Debit Discount on Bonds $380
Credit 14% Bonds Payable $38,000
To record the issue of 10-year bonds at a discount.
June 30:
Debit Interest on Bonds $2,660
Credit Cash $2,660
To record the payment of semi-annual interest.
Dec. 31:
Debit Interest on Bonds $2,660
Credit Cash $2,660
To record the payment of semi-annual interest.
Dec. 31:
Debit Interest on Bonds $3.80
Credit Discount on Bonds $3.80
To amortize the discount on bonds for the year.
b) at a premium:
Debit Cash $39,330
Credit Premium on Bonds $1,330
Credit 14% Bonds Payable $38,000
To record the issue of 10-year bonds at a premium.
June 30:
Debit Interest on Bonds $2,660
Credit Cash $2,660
To record the payment of semi-annual interest.
Dec. 31:
Debit Interest on Bonds $2,660
Credit Cash $2,660
To record the payment of semi-annual interest.
Dec. 31:
Debit Premium on Bonds $133
Credit Interest on Bonds $133
To amortize the premium on bonds for the year.
2. If the bonds are sold at par, the interest in cash to the bondholders every six months is $2,660 ($38,000 x 14%)x 6/12.
Explanation:
Bonds can be issued at par, discount, or premium. They are issued at par when the rate of interest equals the market interest rate. They are issued at a discount when the rate of interest is less than the market interest rate. And they are issued at a premium when the rate of interest is more than the market rate.
Discounts and Premiums on Bonds can be accounted for in two ways: the straight-line method and the effective interest method. In this case, we have applied the straight-line method because of its simplicity. Based on the information provided, the effective interest method cannot be used.
