On January 1, Renewable Energy issues bonds that have a $38,000 par value, mature in ten years, and pay 14% interest semiannually on June 30 and December 31. 1. Prepare the journal entry for issuance assuming the bonds are issued at (a) 99 and (b) 103½. 2. How much interest does the company pay (in cash) to its bondholders every six months if the bonds are sold at par?

Renewable Energy

Journal Entries for  the Issuance of Bonds:

a) at a discount:

Jan. 1:

Debit Cash $37,620

Debit Discount on Bonds $380

Credit 14% Bonds Payable $38,000

To record the issue of 10-year bonds at a discount.

June 30:

Debit Interest on Bonds $2,660

Credit Cash $2,660

To record the payment of semi-annual interest.

Dec. 31:

Debit Interest on Bonds $2,660

Credit Cash $2,660

To record the payment of semi-annual interest.

Dec. 31:

Debit Interest on Bonds $3.80

Credit Discount on Bonds $3.80

To amortize the discount on bonds for the year.

b) at a premium:

Debit Cash $39,330

Credit Premium on Bonds $1,330

Credit 14% Bonds Payable $38,000

To record the issue of 10-year bonds at a premium.

June 30:

Debit Interest on Bonds $2,660

Credit Cash $2,660

To record the payment of semi-annual interest.

Dec. 31:

Debit Interest on Bonds $2,660

Credit Cash $2,660

To record the payment of semi-annual interest.

Dec. 31:

Debit Premium on Bonds $133

Credit Interest on Bonds $133

To amortize the premium on bonds for the year.

2. If the bonds are sold at par, the interest in cash to the bondholders every six months is $2,660 ($38,000 x 14%)x 6/12.

Explanation:

Bonds can be issued at par, discount, or premium.  They are issued at par when the rate of interest equals the market interest rate.  They are issued at a discount when the rate of interest is less than the market interest rate.  And they are issued at a premium when the rate of interest is more than the market rate.

Discounts and Premiums on Bonds can be accounted for in two ways: the straight-line method and the effective interest method.  In this case, we have applied the straight-line method because of its simplicity.   Based on the information provided, the effective interest method cannot be used.

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