I have figured this out I just want to make sure I am correct in my answers.
1.On January 2, 2007, A company issued $100,000 of 5%, 10 year bonds. The bonds will mature in ten years. The bonds were sold for for 95% (or .95 of par) and will pay interest semi-annually, or twice a year, on June 30 and Dec 31. Record the journal entries to record the issuance of the bonds and the interest payments to be made for the year 2011.
2.If you were asked to prepare the balance sheet for the company as of the issue date (January 2, 2011) and as of December 31, 2011 (after the second interest payment was made), how should the liability related to this long term bond payable be disclosed?
3.Record the payment of the above bonds on the maturity date (10 years after the issue date).
1. Journal entries for the issuance of the bonds and interest payments for the year 2011:
a) Issuance of bonds on January 2, 2007:
Date Account Debit Credit
January 2, 2007 Cash $95,000 (0.95 * $100,000)
Bonds Payable $95,000
b) Interest payment on June 30, 2011:
Date Account Debit Credit
June 30, 2011 Interest Expense $2,500 (0.05 * $100,000 * 6/12)
Cash $2,500
c) Interest payment on December 31, 2011:
Date Account Debit Credit
December 31, 2011 Interest Expense $2,500 (0.05 * $100,000 * 6/12)
Cash $2,500
2. Disclosure of the liability related to the long-term bond payable on the balance sheet:
On January 2, 2011:
Liabilities:
Long-term bond payable $95,000 (0.95 * $100,000)
As of December 31, 2011:
Liabilities:
Long-term bond payable $95,000 (0.95 * $100,000)
3. Payment of the bonds on the maturity date:
Date Account Debit Credit
January 2, 2017 Bonds Payable $100,000
Cash $100,000
1. To record the issuance of the bonds and the interest payments for the year 2011, you would need to make the following journal entries:
a) Journal entry for the issuance of bonds on January 2, 2007:
Debit: Cash (100,000 x 0.95) - This represents the proceeds received from selling the bonds.
Credit: Bonds Payable (100,000) - This represents the face value of the bonds issued.
b) Journal entry for the first interest payment on June 30, 2011 (assume interest is $2,500):
Debit: Interest Expense (2,500) - This represents the cost of borrowing the funds.
Credit: Cash (2,500) - This represents the cash paid to bondholders as interest.
c) Journal entry for the second interest payment on December 31, 2011 (also assume interest is $2,500):
Debit: Interest Expense (2,500)
Credit: Cash (2,500)
2. In the balance sheet as of the issue date (January 2, 2011), the liability related to the long-term bond payable should be disclosed as a long-term liability under the category of "Bonds Payable" or "Long-Term Debt." It should be reported at its face value (in this case, $100,000) since there is no discount or premium mentioned.
In the balance sheet as of December 31, 2011 (after the second interest payment was made), the liability related to the long-term bond payable should still be reported as a long-term liability. However, there may be a need to adjust the balance to reflect any interest expense recognized but not paid as of the balance sheet date (if any).
3. To record the payment of the above bonds on the maturity date, you would make the following journal entry:
a) Journal entry on the maturity date (10 years after the issue date):
Debit: Bonds Payable (100,000) - This represents the principal amount of the bonds being repaid.
Credit: Cash (100,000) - This represents the cash paid to bondholders to retire the bonds.