On January 1, 2011, Encino Company issued bonds with a face value of $1,000,000 and a maturity

Question:

On January 1, 2011, Encino Company issued bonds with a face value of $1,000,000 and a maturity date of December 31, 2020. The bonds have a stated interest rate of 8%, payable on January 1 and July 1. They were sold to SeaRay 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 SeaRay 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, 2011, for both companies. Assume SeaRay is carrying the bonds as a long-term held-to-maturity security.

Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...