Mellilo Corporation issued $4,200,000 of 20-year, 9.5 percent bonds on July 1, 2
ID: 2481160 • Letter: M
Question
Mellilo Corporation issued $4,200,000 of 20-year, 9.5 percent bonds on July 1, 2015, at 98. Interest is due on June 30 and December 31 of each year, and all of the bonds in the issue mature on June 30, 2035. Mellilo's fiscal year ends on December 31. Record the issuance of the bonds and entries to be passed post the issue.
-Record the issuance of bonds.
-Record the payment of interest and amortize bond discount
-Record the final interest payment and amortize bond discount.
-Record the retirement of bonds at maturity.
Explanation / Answer
Issuance of bonds:
Being bonds issued @98 (42000*98=41160000i.e.,at discount Discount on issue is to be debited.
2. Payment of interest and amortization of bond discount
Note:
a) discount on issue i.e., ($84000) should be amortized over the life of bonds i.e., 20years.Hence calculated as 84000/20=4200 per annum which is equal to $2100 semi annually.
b) Interest is calculated on face value of bonds @9.5% per annum.Hence calculated as 4200000*9.5/100=399000per annum. Interest for semi annual period is 399000/2=$199500
c) The discount should be amortized by debitting interest expense account.
3. On retirement of bonds
When Bonds are matured, the bonds are repaid at their face value.
Cash account Dr. $4116000 Discount on Bonds payable account Dr. $84000 To Bonds Payable account $ 4200000