Okay... it seems like I can start the problem and even end it but for some reason when closing out the year (the third and fourth journal entry for this discount bond payable) my mind goes blank... I guess I just need either an explanation on how to do journalize them or something... HELP! (The Part that I need Major help with is Bolded and Underlined.. )

Original:
Face: 1,000,000
Int Dates: May 1 and Nov 1
Auth. Date: May 1, 1985
Maturity: 8 years
Selling Price: 96 1/2 %
Contract Interest: 7%
Selling Date: July 1, 1985
Fiscal Year: Jan 1st to Dec 31st.
Journalize the first 6 entries


Face: 1,000,000

Face: 1,000,000
Quotation: * .9625

SP: - 962,500
Selling Price: 962,500

Discount: 37,500
Interest: + 11,666
Cash Rec: 974,166

Interest: 1,000,000*.07*2/12= 11,666 (Rounding to the Nearest Dollar Place)

Journal

July 1
Cash (D) 974166
Discount Bond Pay. (D) 37500
Bond Pay. (Cr) 1000000
Int. Bond Pay (Cr) 11666

Nov 1
Bond Interest Exp (D) 11666
Bond Int. Payable (D) 24930
Discount on Bond Pay. (Cr.) 1596
Cash (Cr) 35000

Dec 31
Bond Int Expense (D)
Discounts on Bond Pay. (Cr.)
Bond Int Pay (Cr.)

Dec 31
Income Summary (D)
Bond Interest Exp (Cr)


May 1st
Bond Interest Expense (D)24929
Bond interest Pay. (D) 11667
Discount on bond Payable (Cr) 1596
Cash (Cr)35000

Nov. 1st
Bond Int. Expense (D) 37394
Discount on Bond Payable (Cr) 2394
Cash (Cr.) 35000

Journalize the first 6 entries
This causes a difficulty right here. I don't know what they are referring to with the "first 6" entries. In the end, all the math comes out the same, but there's different ways of doing the entries. A book decides to do them a particular way and you're not aware there's anything else. So I'm going to ignore that number and just deal with what you did.


Face: 1,000,000

Face: 1,000,000
Quotation: * .9625

SP: - 962,500
Selling Price: 962,500

Discount: 37,500
Interest: + 11,666
Cash Rec: 974,166
You actually got the entire concept here correct so this isn't what is messing you up. Except for one thing. 96 1/2% = 96.5% = .965. Not .9625. So you need to correct your initial selling price, which also changes your discount, which also changes your amortization. From here on out, I will proceed as though your amortization is correct -- so that I can just give you the idea and not worry about that part.


July 1
Cash (D) 974166
Discount Bond Pay. (D) 37500
Bond Pay. (Cr) 1000000
Int. Bond Pay (Cr) 11666
This is questionable. You've got the right idea. (Again, except for the discount being messed up.) However, most books would take the 11,666 -- which rounds to 11,667 by the way -- and would have credited it to Interest Expense. Later when the whole payment is made, that portion would net itself back out, leaving only the interest for the other 4 months.

I never learned to put it in a payable, but it seems like a perfectly reasonable thing to do. I just can't tell you if it's correct from your book's point of view. You'll have to check that yourself to make sure that's how they do a between-interest-period entry. And again, I will proceed under the assumption that it's correct.


Nov 1
Bond Interest Exp (D) 11666
Bond Int. Payable (D) 24930
Discount on Bond Pay. (Cr.) 1596
Cash (Cr) 35000
OK, now here's where you're getting messed up. You put 11,666 in the interest payable. If you're going to do that, you have to take the same amount back out. Instead, you're charging that amount to the expense. In reality, here's what we have: two months were "paid up front" by the bondholders. But when the interest is due, the company will pay the entire six months. Two months of that is paying them back what they paid up front. (Which you have in a payable.) The interest expense (not counting amortization) is the other four months. i.e. you have them turned around. Get that straightened out and you'll be fine. (Don't forget to correct the amortization amount since your initial discount was incorrect.)

BTW, nice catch on the amortization. When I went through it, I did six month's worth here. I knew your numbers would be off, but not by that much. It took me a sec to realize that's cause it's only four months. :)


Dec 31
Bond Int Expense (D)
Discounts on Bond Pay. (Cr.)
Bond Int Pay (Cr.)
I must say at this point that your problem did everything they could to make this as complicated as possible. Issued between interest dates. Make the interest dates at times that don't match a calendar. So you're continually splitting up the interest periods constantly. It's actually not difficult as long as you keep your head on straight about where you're at -- it's just a pain in the rear end.

Interest was last paid Nov. 1. At Dec. 31, how much interest needs accrued? How much of the discount needs amortized? A hint is to not make this difficult. Just think about that a minute, answer those two questions, and I think you will have it.


Dec 31
Income Summary (D)
Bond Interest Exp (Cr)[/B][/U]
Ah, so one of your 6 entries is the closing entry. That wouldn't have occurred to me. (Mostly cause they really aren't related -- they're just trying to get you to think about how much is in that interest expense acct.) Once you get them fixed, go through your prior entries and put together everything that went into or out of interest expense. Make a t account if you have to and "post" all these entries into it. Then balance it. There's your answer.


May 1st
Bond Interest Expense (D)24929
Bond interest Pay. (D) 11667
Discount on bond Payable (Cr) 1596
Cash (Cr)35000
Curious that you knew what to take out of interest payable here, but you don't know what to put in it at Dec. 31. It's the same number. The concept here is correct, as soon as you fix that discount.

(Someone asked the other day when reversing entries are necessary. Jan 1 would have been a good time to make one to lessen this complication. Don't suppose they taught you that?)


Nov. 1st
Bond Int. Expense (D) 37394
Discount on Bond Payable (Cr) 2394
Cash (Cr.) 35000
Ditto. Correct once you fix the discount. Wow, all those entries and this is the only one covering an actual six-month period.