Prepare journal entries to record the following transactions relating to long-te
ID: 2419997 • Letter: P
Question
Prepare journal entries to record the following transactions relating to long-term bonds of Flynn. Inc. (Show computations.) On June 1, 2004. Flynn, Inc. issued $800,000, 6% bonds for $783,520, which includes accrued interest. Interest is payable semiannually on February 1 and August 1 with the bonds maturing on February 1, 2014. The bonds are callable at 102. On August 1, 2004, Flynn paid interest on the bonds and recorded amortization. Flynn uses straight-line amortization. On February 1, 2006, Flynn paid interest and recorded amortization on all of the bonds, and purchased $480,000 of the bonds at the call price. Assume that a reversing entry was made on January 1, 2006.Explanation / Answer
Journal entries:
(A). June,1 2004 Cash A/c Dr. 783,520
Discount on bond payable Dr. 32,480
To Bond Payable Cr. 800,000
To Interest payable Cr. 16,000
Being 4 months interest accrued bonds issued for a discount.
(B). August, 1 2004 Interest Expense 8,000
Interest payable 16,000 [ Accrued interest received on issue ]
To Discount on bond payable 1,624
To cash 22,376
Being semi-annual interest paid on bond & recorded amortization.
(C). February 1, 2006. Interest expense Dr. 24,000
To Discount on bond payable 1,624
To Cash 22,376
Being semi-annual interest paid and recorded amortization.
Bond payable A/c Dr. 480,000
Loss on retirement of bond A/c 9,600
To Cash A/c 470,112
To Discount on bond payable A/c 19,488
Being $480,000 of the bonds purchased @ call price of $102 assuming that discount
amortized previously pursuant to amount of $480,000 is reversed previously and cancelled while purchasing the
bond.
Note: 1) While issue of bond, interest accrued for a period of 4 months and calculated as
interest accrued= 800,000*6%*4/12 = 16,000 whereas semi-annual interest paid = 800,000*6%*6/12 = 24,000.
2) Discount on bond payable is the balance amount in Entry1 which is $32,480 and the same amount is
amortized over a period of 10 years which equals to 32,480/10 = 3,248 p.a.
= 1,624 semi-annually written off