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Illustration 2: Bonds PayableIllustration 2: Bonds Payable On July 1, 2007, Mustang Corporation issues

$100,000 of its 5 year bonds which have an annual stated rate of 7%, and pay interest semiannually each June 30 and December 31, starting December 31, 2007. The bonds were issued at 104% of face value.

Cash received? 104% of 100,000 = $104,000

Prepare the journal entry to record the issue of the bond:

Cash 104,000Bonds Payable 100,000

(face)Premium on B/P 4,000

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Illustration 2 - Journal EntriesIllustration 2 - Journal EntriesJE at 12/31/07 to pay interest:

Note that the numbers for each interest payment are the same each payment, because the straight-line method is used.

JE at 6/30/2012 to retire the bonds:

Interest Expense 3,100Premium on B/P 400

Cash 3,500

Bonds Payable 100,000Cash 100,000

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Illustration 3: Bonds Payable (Discount)Illustration 3: Bonds Payable (Discount) On January 1, 2006, Corvette Corporation

issues $100,000 of its 5 year bonds which have an annual stated rate of 5%, and pay interest annually each December 31, starting December 31, 2006. The bonds were issued at 96% of face value.

Calculate the cash received for the bond:96% of 100,000 = $96,000Issued at a discount of $4,000

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Illustration 3Illustration 3 : Journal Entry at Issue : Journal Entry at IssueJE at 1/1/06 to issue the bonds:

Discount on Bonds Payable is located in the liability section of the balance sheet, as a contra, and offsets Bonds Payable.On the balance sheet at 1/1/06: Liabilities:

Bonds PayableDiscount on B/P

Cash 96,000Discount on B/P 4,000

Bonds Payable 100,000

100,000(4,000) 96,000

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Illustration 3Illustration 3 : Journal Entry to Pay Interest : Journal Entry to Pay InterestJE at 12/31/06 to pay interest:Calculations first: Cash paid=Face x stated rate x time =

= 100,000 x .05 x 1 yr. = $5,000Amortization of discount =

= 4,000/5 = 800 per yearInterest expense = 5,000 + 800 = $5,800Now journal entry:

Interest Expense 5,800Discount on B/P 800Cash 5,000

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Back to Illustration 2 – Bond RetirementBack to Illustration 2 – Bond RetirementAssume that Mustang’s bonds were retired on June 30,

2008 (after the interest payment). Mustang Corporation paid $103,000 to retire the bonds from the marketplace. Record the entries on June 30, 2008.

JE at 6/30/08 to pay the interest (see Slide 10):

JE at 6/30/08 to retire the bonds (CV = 103,200; see amort. Schedule. Slide 11):

Interest Expense 3,100Premium on B/P 400

Cash 3,500

Bonds Payable 100,000Premium on B/P 3,200

Cash 103,000Gain on Retirement 200