On March 1, 2008, five-year bonds are sold for $254,013 that have a face value of $250,000 and an interest rate of 10%. Interest is paid semi-annually on March 1 and September 1. Using the straight-line amortization method, prepare the borrower's journal entries on
March 1, 2008
September 1, 2008
December 31, 2008
March 1, 2009
To prepare the borrower's journal entries for each of the given dates, we need to understand the concept of straight-line amortization. In this method, the bond discount or premium is amortized equally over the life of the bond. Let's proceed with the journal entries for each date:
1. March 1, 2008:
On this date, the bonds were initially issued. The borrower receives cash for the sale of the bonds. The journal entry would be as follows:
Debit: Cash (Amount received for selling the bonds)
Credit: Bonds Payable (Face value of the bonds)
To calculate the cash received, we need to consider the selling price of the bonds. In this case, the selling price is given as $254,013.
2. September 1, 2008:
On this date, the borrower needs to pay interest to the bondholders for the first semi-annual period. The journal entry would be as follows:
Debit: Bond Interest Expense (Interest payment for the period)
Credit: Cash (Amount of interest paid)
To calculate the interest payment, we need to consider the face value, interest rate, and the period for which interest is being paid. In this case, the face value is $250,000, and the interest rate is 10%. As interest is paid semi-annually, the payment for six months is calculated.
3. December 31, 2008:
This date is the end of the fiscal year, and we need to adjust the bond interest expense and interest payable accordingly. The journal entry would be as follows:
Debit: Bond Interest Expense (Adjustment for accrued interest)
Credit: Bond Interest Payable (Accrued interest as of December 31)
To calculate the accrued interest, we again consider the face value, interest rate, and the number of days from the last interest payment (September 1) to December 31.
4. March 1, 2009:
On this date, we need to repeat the process of paying interest to the bondholders for the semi-annual period. The journal entry would be as follows:
Debit: Bond Interest Expense (Interest payment for the period)
Credit: Cash (Amount of interest paid)
Similar to September 1, 2008, we will calculate the interest payment using the face value, interest rate, and the period for which interest is being paid (six months).
Remember that these calculations involve specific numbers and dates provided in the question. Make sure to adjust the calculations and dates if required for different scenarios.