1. 1 Illustration 2: Bonds Payable On July 1, 2007, Mustang Corporation issues $100,000 of its 5 year bonds which have an annual stated rate of 7%, and pay interest semiannually each June 30 and December 31, starting December 31, 2007. The bonds were issued at 104% of face value. Cash received? 104% of 100,000 = $104,000 Prepare the journal entry to record the issue of the bond: Cash 104,000 Bonds Payable100,000 (face) Premium on B/P 4,000

2. 2 Illustration 2 - Journal Entries JE at 12/31/07 to pay interest: Note that the numbers for each interest payment are the same each payment, because the straight- line method is used. JE at 6/30/2012 to retire the bonds: Interest Expense 3,100 Premium on B/P 400 Cash 3,500 Bonds Payable 100,000 Cash100,000

3. 3 Illustration 3: Bonds Payable (Discount) On January 1, 2006, Corvette Corporation issues $100,000 of its 5 year bonds which have an annual stated rate of 5%, and pay interest annually each December 31, starting December 31, 2006. The bonds were issued at 96% of face value. Calculate the cash received for the bond: 96% of 100,000 = $96,000 Issued at a discount of $4,000

4. 4 Illustration 3 : Journal Entry at Issue JE at 1/1/06 to issue the bonds: Discount on Bonds Payable is located in the liability section of the balance sheet, as a contra, and offsets Bonds Payable. On the balance sheet at 1/1/06: Liabilities: Bonds Payable Discount on B/P Cash 96,000 Discount on B/P 4,000 Bonds Payable 100,000 100,000 (4,000) 96,000

5. 5 Illustration 3 : Journal Entry to Pay Interest JE at 12/31/06 to pay interest: Calculations first: Cash paid=Face x stated rate x time = = 100,000 x.05 x 1 yr. = $5,000 Amortization of discount = = 4,000/5 = 800 per year Interest expense = 5,000 + 800 = $5,800 Now journal entry: Interest Expense 5,800 Discount on B/P 800 Cash 5,000

6. 6 Back to Illustration 2 – Bond Retirement Assume that Mustang’s bonds were retired on June 30, 2008 (after the interest payment). Mustang Corporation paid $103,000 to retire the bonds from the marketplace. Record the entries on June 30, 2008. JE at 6/30/08 to pay the interest (see Slide 10): JE at 6/30/08 to retire the bonds (CV = 103,200; see amort. Schedule. Slide 11): Interest Expense3,100 Premium on B/P 400 Cash 3,500 Bonds Payable 100,000 Premium on B/P3,200 Cash 103,000 Gain on Retirement200