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Q6BE

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Intermediate Accounting (Kieso)
Found in: Page 753

Short Answer

On January 1, 2017, JWS Corporation issued $600,000 of 7% bonds, due in 10 years. The bonds were issued for $559,224, and pay interest each July 1 and January 1. JWS uses the effective-interest method. Prepare the company’s journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry. Assume an effective-interest rate of 8%

The total for both the debit and credit sides is $644,792.68.

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Step by Step Solution

Meaning of Coupon Bond

Bonds that pay periodic interest amount to the bondholder at equal frequency is coupon bond. Interest paid on bond at stated coupon rate.

Journal Entries

Date

Accounts and Explanation

Debit

Credit

January 1, 2017

Cash

$559,224

Discount on bonds payable

$40,776

Bonds Payable

$600,000

July 1, 2017

Interest expenses (559,224 x 8% x 1/2)

$22,368.96

Cash

$21,000.00

Discount on Bonds Payable

$1,368.96

December 31, 2017

Interest expenses

$22,423.72

Interest Payable

$21,000

Discount on Bonds Payable

$1,423.72

Working:

Discount on bonds payable on January 1= ($600,000-$559,224) = $40,776

Interest expenses on July 1 = ($559,224 x 8% x 1/12) = $22,368.96

Interest paid in cash paid on July 1= ($600,000 x 7% x 1/2) = $21,000.

Interest expenses on December 31 = {(559,224 +$1,368.96) x 8% x 1/2} = $22,423.72

Interest payable on December 31, 2017 = ($600,000 x 7% x 1/2) = $21,000

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