On January 31, 2016, Danvers Logistics, Inc., issued five-year, 7% bonds payable with a face value of $10,000,000. The bonds were issued at 96 and pay interest on January 31 and July 31. Danvers Logistics, Inc., amortizes bond discount by the straight-line method. Record:
a. Issuance of the bonds on January 31, 2016.
b. The semiannual interest payment and amortization of bond discount on July 31, 2016.
c. The interest accrual and discount amortization on December 31, 2016.

Journal entries are given below

Explanation:

Journal Entries

Requirement A:  Issuance of the bonds on January 31, 2016.

                                                      Debit            Credit

Cash (w)                                    $9,600,000  

Discount on bonds payable     $400,000  

Bonds payable                                               $10,000,000

Working

Cash = 10,000,000*0.96 = $9,600,000  

Discount on bonds payable = 10,000,000*0.04 = $400,000  

Requirement B: The semiannual interest payment and amortization of bond discount on July 31, 2016.

                                                       Debit        Credit

Interest expense                      $390,000  

Cash (w)                                                        $350,000

Discount on bonds payable (w)                    $40,000

Working

Cash = 10,000,000x 0.07 x 6/12 = $350,000

Discount on bonds payable = 400000/(5months*2) = $40,000

Requirement C: The interest accrual and discount amortization on December 31, 2016.

                                                        Debit          Credit

Interest expense                       $325,000

Cash (w)                                                          $291,666.67

Discount on bonds payable (w)                     $33333.33

Working

Cash = 10,000,000x 0.07 x 5months/12months = 291,666.67

Discount on bonds payable = 400,000/(5*2)*5/6 = 33,333.33

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