The Cleveland Historical Society issues $40 million of 6 percent, 15-year bonds
ID: 2479041 • Letter: T
Question
The Cleveland Historical Society issues $40 million of 6 percent, 15-year bonds at a price of $36,321,000 to nance the construction of a new museum. The price reects an annual yield of 7.0 percent.
1. Prepare the journal entry to record the issuance of the bonds. Indicate the category of funds (e.g., unrestricted, temporarily restricted, permanently restricted) in which the entry would be made.
2. Prepare the journal entry to record the rst semiannual payment of bond interest.
3. Prepare the journal entry to record the second semiannual payment of bond interest
Explanation / Answer
CATEGORY OF BOND - PERMANENTLY RESTRICTED
FIRST SEMI ANNUAL INTEREST BASED ON THE YEILD RATE AND CARRYING VALUE OF BOND
= ($36321000 * 7%) 6/12
= $1271235
INTEREST PAID/PAYABLE ON STATED INTEREST RATE ON BOND FACE VALUE
= ($40000000 * 6%) 6/12
= $1200000
DIFFRENCE
= $1271235 - $1200000
= $71235
SECOND SEMI ANNUAL INTEREST BASED ON THE YEILD RATE AND CARRYING VALUE OF BOND
= [($36321000 + $71235) * 7%] 6/12
= $1273728 (ROUNDED)
INTEREST PAID/PAYABLE ON STATED INTEREST RATE ON BOND FACE VALUE
= ($40000000 * 6%) 6/12
= $1200000
DIFFRENCE
= $1273728 - $1200000
= $73728
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ACCOUNT TITLE DEBIT $ CREDIT $ CASH 36321000 DISCOUNT ON BONDS PAYABLE 3679000 BONDS PAYABLE 40000000 INTERSEST EXPENSES 1271235 CASH 1200000 DISCOUNT ON BONDS PAYABLE 71235 INTEREST EXPENSES 1273728 CASH 1200000 DISCOUNT ON BONDS PAYABLE 73728