On August 1, 2009 a company issues bonds with a par value of $600,000. The bonds mature in 10 years, and pay 6% annual interest, payable each February 1 and August 1. The bonds sold at $592,000. The company uses the straight-line method of amortizing bond discounts. The company's year-end is December 31. Prepare the general journal entry to record the sale of the bonds on interest accrued at December 31, 2009 and the first interest payment on February 1, 2010.

discount on BP 8,000 debit

cash 592,000 debit

bond payable 600,000 credit

-to record issuance of the bonds--

interest expense 15,416.67 debit

interest payable 15,000 credit

discount on BP 416.67 credit

--to record year-end adjustment entry--

interest payable 15,000 debit

interest expense 3,083.33 debit

cash 18,000 credit

Discount on BP 416.67 credit

-to record first interest payment to bondholders--

Explanation:

proceeds from the bonds: 592,000

face value of the bonds. (600,000)

discount on BP (8,000)

We amortize over the life of the bond in equal parts:

8,000 / 20 payment (10years x 2 payment per year) = 500

interest accrued from August 1st to December 31th:

face value x rate x time accrued

600,000 x 6% x 5/12 = 15,000

accrued proportional amortization

amortizationfor 6 months x accrued month

from Augsut 1st to December 31th

500 x 5/6 = 416.67

February 1st payment:

600,000 x 6% x 1/12 = 3,000 interest expense

cash outlay:

600,000 x 6% x 6/12 = 18,000

amortization 500 - 416.67 = 83.33