On February 1, 2021, Strauss-Lombardi issued 8% bonds, dated February 1, with a face amount of $810,000. The bonds sold for $735,474 and mature on January 31, 2041 (20 years). The market yield for bonds of similar risk and maturity was 9%. Interest is paid semiannually on July 31 and January 31. Strauss-Lombardi's fiscal year ends December 31. Required: 1. to 4. Prepare the journal entries to record their issuance by Strauss-Lombardi on February 1, 2021, interest on July 31, 2021 (at the effective rate), adjusting entry to accrue interest on December 31, 2021 and interest on January 31, 2022. (Do not round your intermediate calculations and round your final answers to nearest whole dollar. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer and Explanation:

According to the scenario, computation of the given data are as follow:-

Interest paid semiannually on July 31, and Jan 31,

so the rate of interest is : - 9% * 6:12 = 4.5% and 8% * 6:12 = 4%

Date Interest Paid interest 4% Amortized Carrying value

expenses 4.50% discount amount

February, 1 $735,474

July, 31 $33,096 - $32,400 $696 $736,170

Jan. 31 $33,128 - $32,400 $728 $736,898

Working note =

Paid interest = $810,000 * 4:100 = 32,400

Interest expenses in July, 31 = $735,474 * 4.5 : 100

= 33,096.33 or $33,096

Interest expenses in January, 31 = $736,170 * 4.5:100

= 33,127.65 or $33,128

Carrying Value = Previous Carrying Value + Amortized Discount Amount

July, 31

= $735,474 + $696

= $736,170

Jan, 31 = $736,170 + $728 = $736,898

Journal Entry

Feb, 1 Cash A/c Dr. $735,474

Discount on bonds payable A/c Dr. $74,526

To bonds payable A/c $810,000

(To Record the issuance of bond)

July, 31 Interest expense A/c Dr. $33,096

To Discount on bonds payable A/c $696

To Cash A/c $32,400

(To Record the interest expense)

Dec, 31 Interest expense A/c Dr. $27,606

(9% * 5:12) * $736,170

To Discount on bonds payable A/c $606

To Cash A/c $27,000 (8% * 5:12) * $810,000

(To Record the accrued interest)

Jan, 31 Interest expense A/c Dr. $5,522

Interest payable A/c Dr. $27,000

To Cash A/c $32,400

To Discount on bonds payable A/c $122

($728 - $606) = $122

(To Record the interest on January)