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 2007.
To record the issuance of the bonds and the interest payments for the year 2007, we need to follow the steps below:
1. Calculate the total cash received from the issuance of the bonds:
The bonds were issued for 95% (or .95) of par value, which is $100,000. So, the cash received from the issuance would be:
$100,000 x 0.95 = $95,000.
2. Record the journal entry for the issuance of the bonds:
The journal entry to record the issuance of the bonds would be as follows:
Debit: Cash ($95,000)
Credit: Bonds Payable ($95,000)
3. Calculate the semi-annual interest payment:
The face value of the bonds is $100,000 and the stated interest rate is 5%. Hence, the annual interest payment would be:
$100,000 x 5% = $5,000.
Since the interest is paid semi-annually, the semi-annual interest payment would be:
$5,000 / 2 = $2,500.
4. Record the journal entry for the first interest payment on June 30, 2007:
To record the first interest payment, we need to debit the Interest Expense and credit Cash.
Debit: Interest Expense ($2,500)
Credit: Cash ($2,500)
5. Record the journal entry for the second interest payment on December 31, 2007:
The second interest payment would have the same journal entry as the first interest payment:
Debit: Interest Expense ($2,500)
Credit: Cash ($2,500)
That's it! You have now recorded the journal entries to record the issuance of the bonds and the interest payments for the year 2007.