Bond Issuance and Adjusting Entries
On January 1, 2008, Encino Company issued bonds with a face value of $1,000,000 and a maturity date of December 31, 2017. The bonds have a stated interest rate of 8%, payable on January 1 and July 1. They were sold to Sea Ray Company for $820,744, a yield of 11%. It cost Encino $40,000 to issue the bonds. This amount was deferred and amortized over the life of the issue using the straight line method. Assume that both companies have December 31 year ends and that Encino uses the effective interest method to amortize any premium or discount and Sea Ray uses the straight line method.
Instructions:
1. Make all entries necessary to record the sale and purchase of the bonds on each company’s books.
2. Prepare the adjusting entries as of December 31, 2008, for both companies. Assume Sea Ray is carrying the bonds as a long term held to maturity security.