On January 1, 2021, Universe of Fun issues $750,000, 9% bonds that mature in 15 years. The market interest rate for bonds of similar risk and maturity is 10%, and the bonds issue for $692,353. Interest is paid semiannually on June 30 and December 31. Record the issuance of the bonds on January 1, the interest payments on June 30, and December 31, 2021.

Universe of Fun

Journal Entries are used to record transactions:

January 1, 2021:

Debit Cash Account $692,353

Debit Bonds Discount $57,647

Credit Bonds Payable $750,000

To record the issue of 9% bonds, semiannual interest, that mature in 15 years.

June 30, 2021:

Debit Interest Expense $35,672

Credit Discount Amortization $1,922

Credit Cash Account $33,750

To record the interest expense and discount amortization.

December 31, 2021:

Debit Interest Expense $35,672

Credit Discount Amortization $1,922

Credit Cash Account $33,750

To record the interest expense and discount amortization.

Step-by-step explanation:

Bonds Payable = $750,000

Bonds issued at a discount = $692,353

Bonds discount = $57,647 ($750,000 - $692,353)

Interest rate = 9%

Interest expense, semiannually = $33,750 ($750,000 * 9%)/2

Maturity of bonds = 15 years

Bonds discount will be amortized over 15 at $3,843 per annum ($57,647/15) on straight-line basis

Bonds discount semiannually = $1,922

b) Bonds discount arise as Universe of Fun issues the $750,000 bonds for $692,353 (less by $57,647).  This means that the bondholders are paying less than the face value, but will be repaid the full face value at maturity.

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