Record Necessary Entries for Salt Foods Bonds Purchases
What entries need to be recorded regarding Salt Foods' bond purchases?
1. How should the purchase of the bonds be recorded?
2. How should the receipt of interest payments be recorded?
3. How should the amortization of the bond discount be handled?
Journal Entries for Salt Foods' Bond Purchases
1. Purchase of the bonds:
No Journal Entry Required
2. Receipt of interest payments:
No Journal Entry Required
3. Amortization of bond discount:
No Journal Entry Required
To record the necessary entries regarding the bonds purchased by Salt Foods, we need to consider the initial purchase, receipt of interest payments, and the amortization of the bond discount.
Purchase of the bonds: On January 1, Salt Foods would debit the "Bonds Payable" account for the face value of the bonds purchased, which is $40,000 (40 bonds x $1,000 face value per bond). They would credit the "Cash" account for the amount paid, which is $42,975, reflecting the purchase price including any premium or discount.
Receipt of interest payments: On June 30 and December 31 of each year, Salt Foods would receive semiannual interest payments. Each payment would be calculated by multiplying the face value of the bonds ($1,000) by the stated interest rate (7.6%), and then dividing it by two since the interest is paid semiannually. Salt Foods would debit the "Cash" account for the amount received and credit the "Interest Revenue" account.
Amortization of bond discount: Since the market interest rate (6%) is lower than the stated interest rate on the bonds (7.6%), the bonds were purchased at a discount. To amortize the bond discount over the life of the bonds, Salt Foods would debit the "Bond Interest Expense" account and credit the "Discount on Bonds Payable" account on each interest payment date. The amount of the discount amortization is calculated by taking the difference between the cash interest payment and the interest expense recognized.
It's important to note that without specific information about the bond's amortization schedule, the exact amounts for interest revenue and bond interest expense cannot be determined. However, the entries described above provide a general framework for recording the necessary journal entries related to the bonds.