On January 1, 2016, Rossi & Co sold 10% bonds dated January 1, 2016, with a face
ID: 2461207 • Letter: O
Question
On January 1, 2016, Rossi & Co sold 10% bonds dated January 1, 2016, with a face amount of $10 million. The bonds mature in 2025 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31.
Required:
1. Prepare the journal entry to record the bond sold by Rossi & Co on January 1, 2016.
2. Prepare Rossi & Co.’s journal entry to record interest on June 30, 2016, using the effective interest method.
3. Prepare Rossi & Co.’s journal entry to record interest on December 31, 2016, using the effective interest method
Explanation / Answer
Solution.
1. The journal entry to record the bond sold by Rossi & Co on January 1, 2016.
Bank Dr. 10 million
To 10% Bond 10 million
( Being 10% Bond sold )
2. journal entry to record interest on June 30, 2016, using the effective interest method.
* Discount on Bond payable Dr. 10,000
To Interest income 10,000
( Interest of 6 month is recorded 20,000X6/12 )
3. Rossi & Co.’s journal entry to record interest on December 31, 2016, using the effective interest method
* Discount on Bond payable Dr. 10,000
To Interest income 10,000
( Interest of 6 month is recorded 20,000X6/12 )
*Discount of the Bond = 12% - 10% = 2%
Discount amount = 10,000,000 X 2% = 200,000
Interest as per effective interest method = Discount amount / no, of life of bond
= 200,000 / 10
= 20,000 p.a.
for six month = 20,000X6/12 = 10,000