Chapter 14, Problem 14.11E

Bonds; effective interest; adjusting entry

• LO14–2

On February 1, 2018, Strauss-Lombardi issued 9% bonds, dated February 1, with a face amount of $800,000. The bonds sold for $731,364 and mature on January 31, 2038 (20 years). The market yield for bonds of similar risk and maturity was 10%. Interest is paid semiannually on July 31 and January 31. Strauss-Lombardi’s fiscal year ends December 31.

Required:

1. Prepare the journal entry to record their issuance by Strauss-Lombardi on February 1, 2018.

2. Prepare the journal entry to record interest on July 31, 2018 (at the effective rate).

3. Prepare the adjusting entry to accrue interest on December 31, 2018.

4. Prepare the journal entry to record interest on January 31, 2019.