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RKO Company sold bonds with a face value of $890,000 for $955,501. The bonds have a coupon rate of 7 percent, mature in 10 years, and pay interest annually every December 31. All of the bonds were sold on January 1 of this year. Record the sale of the bonds on January 1 and the payment of interest on December 31 of this year, without the use of a premium account. RKO uses the effective-interest amortization method. Assume an annual market rate of interest of 6 percent.

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Answer:

June 1

Dr cash $955,501

Cr Discount on bond payable $65,501

Cr Bond payable $890,000

June 30

Dr Interest expense $26,700

Dr Discount on bonds 4,450

Cr Cash $31,150

Explanation:

RKO Company Journal entry

June 1

Dr cash $955,501

Cr Discount on bond payable $65,501

($955,501-$890,000)

Cr Bond payable $890,000

June 30

Dr Interest expense $26,700

($890,000×6%×1/2)

Dr Discount on bonds 4,450

Cr Cash $31,150

($890,000×7%×1/2)

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