Problem:
On April 1, 2007, the Diamond Bottle Company sold $400,000 of long term bonds for $331,180. The bonds will mature in 10 years and have a stated interest rate of 9% and an effective yield rate of 12%. The bonds pay interest semi-annually on September 30 and March 31 of each year. The bonds are to be accounted for under the effective interest method. Diamond Bottle's fiscal year ends on December 31.
Instructions: (Show all calculations) ROUND ALL AMOUNTS TO NEAREST $
Date Credit Cash Interest Expense Bond Discount Carrying Amount of Bonds
4/1/07 331,180
9/30/07 $18,000 $19,871 ($1,871) $333,051
3/31/08 $18,000 $19,983 ($1,983) $335,034
9/30/08 $18,000 $20,102 ($2,102) $337,136
3/31/09 $18,000 $20,228 ($2,228) $339,364
9/30/09 $18,000 $20,362 ($2,362) $341,726
3/31/10 $18,000 $20,504 ($2,504) $344,229
Q1. Prepare the journal entry to record the issuance of the bonds.
Q2. Prepare the journal entry to record the payment of interest and the recording of interest expense for the first payment date.
Q3. Assuming all required interest payment have been made, prepare the adjusting journal entry to be made on December 31, 2008.
Q4. Show how the bonds would be shown on a Balance Sheet prepared as of December 31, 2008.