Chapter 8
Non-Current Liabilities
428
Case Study
CS-1 (
1
7
)
You & Us Company issued a callable six-year, $1,000,000 bond on December 1, 2013. The
interest rate was 4% per year and interest payment would be made semi-annually. In 2013,
similar bonds were paying 6% interest on average.
On December 1, 2016, the average market interest rate for similar bonds had decreased to
2%. You & Us Company decided to redeem all the outstanding bonds issued in 2013 and issue
new bonds. The new bonds will also have an annual interest rate of 4%. You & Us Company’s
fiscal year-end is on December 31.
In 2013, You & Us Company hired a bookkeeper, who did not have a professional accounting
designation. The bookkeeper recorded the journal entries for the issuance of the bond and
the two payments of interest in 2014, which are all shown below.
Date
Account Titles and Explanations
Debit
Credit
Dec 1, 2013 Cash
900,480
Discount on Bonds
99,520
Bonds Payable
1,000,000
To record issuing of $1,000,000 bonds at discount
Dec 31, 2013 No journal entry on issued bonds
Jun 1, 2014 Interest Expense
20,000
Cash
20,000
To record interest payment on bonds
Dec 1, 2014 Interest Expense
20,000
Cash
20,000
Record interest payment on bonds
Dec 31, 2014 No journal entry on issued bonds
