Explanation Bonds: Bonds are the financial debt instruments issued by the corporations to raise capital for the purposes of purchasing assets, or paying debts. Bonds are bought by individual investors, or corporations, or mutual funds, and receive a fixed interest revenue. Journal entry : Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically. Debit and credit rules: Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts. Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts. Journalize the bond transactions for Company Z . Transaction on October 1: Date Account Titles and Explanation Post Ref. Debit ($) Credit ($) October 1 Bond Interest Expense 23,442 Discount on Bonds Payable 942 Cash 22,500 (Record payment of semiannual interest and the amortization of discount) Table (1) Description: Bond Interest Expense is an expense account. Expenses reduce the stockholders’ equity account, and a decrease in equity is debited. Discount on Bonds Payable account is a contra-liability account, the account which decreases the balance of the respective liability account. Since the discount is amortized, the discount value is reduced, and a decrease in contra-liability is credited. Cash is an asset account. The amount is decreased because cash is paid, and a decrease in assets should be credited. Working Notes: Compute the amount of bond interest expense . Bond interest expense = { Carrying value of the bonds on April 1× Market interest rate× Semiannual interest payment period } =$468,845×10%× 1 2 =$23,442 (1) Compute the cash paid . Cash paid = { Face value of the bonds× Stated interest rate× Semiannual interest payment period } =$500,000×9%× 1 2 =$22,500 (2) Compute the amount of amortized discount . Discount amortized = Bond interest expense–Cash paid =$23,442–$22,500 =$942 (3) Note: Refer to Equations (1) and (2) for both the values. Transaction on December 31: Date Account Titles and Explanation Post Ref. Debit ($) Credit ($) December 31 Bond Interest Expense 11,745 Discount on Bonds Payable 495 Bond Interest Payable 11,250 (Record interest expense accrued) Table (2) Description: Bond Interest Expense is an expense account. Since the interest is accrued, the interest expense increased. Expenses reduce the stockholders’ equity account, and a decrease in equity is debited. Discount on Bonds Payable account is a contra-liability account, the account which decreases the balance of the respective liability account. Since the discount is amortized, the discount value is reduced, and a decrease in contra-liability is credited. Bond Interest Payable is a liability account. Since the liability to pay interest has increased, liability increased, and an increase in liability is credited. Working Notes: Compute carrying value of bonds on December 31 . Carrying value on December 31 = { Carrying value on April 1+ Discount amortized on October 1 } =$468,845+$942 =$469,787 (4) Note: Refer to Equation (3) for value and computation of amortized discount. Compute the amount of bond interest expense . Bond interest expense = { Carrying value of the bonds on December 31× Market interest rate× Period of the interest accrued ( October 1 to December 31 ) } = $ 469 , 787 ×10%× 3 12 =$11,745 (5) Note: Refer to Equation (4) for value and computation of carrying value