Question

Business Course * Return to course ! My Subscriptions Yosimar Huerta Question 4 Partially correct Mark 18.00 out of 24.00 P Flag question Bonds Payable Journal Entries; Effective Interest Amortization On December 31, 2017, Karen Company issued $400,000 of 10-year, ten percent bonds payable for $454,361, yielding an effective interest rate of eight percent. Interest is payable semiannually on June 30 and December 31. Prepare journal entries to reflect (a) the issuance of the bonds, (b) the semiannual interest payment and premium amortization (effective interest method) on lune 30, 2018. and (c) the semiannual interest payment and premium amortization on December 31, 2018. Round amounts to the nearest dollar. General Journal Description Support Date Debit Credit a) $ 454,361 $ Dec.31 Cash Premium on Bonds Payable Bonds Payable 54,361 400,000 0

Answer 1

Solution:

a) The bond premium of $54,361 must be amortized to interest expense over the life of the bond. The amount of bond premium to be charged to interest expense each semi-annual period would be = market rate of interest x Book value of bond.The Interest paid amount will be $400,000 x 5% = $20,000, each semi-annual period. Difference in interest expense and amount paid will be amortized to premium on bonds .

Date	Description	Debit	Credit
a) Dec 31	Cash	$ 454,361	0
	Premium On Bonds Payable	0	$ 54,361
	Bonds Payable	0	$ 400,000
	(To record issuance of bonds)
b) June 30	Bond Interest Expense	$ 18,174	0
	Premium on Bonds Payable	$ 1,826	0
	Cash	0	$ 20,000
	(To record Semi-annual interest payment and premium amortization)
c) Dec 31	Bond Interest Expense	$18,101	0
	Premium on Bonds Payable	$1,899	0
	Cash	0	$ 20,000
	(To record Semi-annual interest payment and premium amortization)

Workings:

(A)	(B)	(C)	(D)	(E)	(F)	(G)
Date	Interest Payment (5% of face value)	Interest expense(4% of Book value)	Amortization of bond premium (C)-(B)	Credit Balance in bond premium account	Credit Balance in Bonds Payable account	Book Value of the bonds (F)+(E)
Dec 31				54,361	400,000	454,361
June,30	20,000	18,174	(1,826)	52,535	400,000	452,535
Dec 31	20,000	18,101	(1,899)	50,636	400,000	450,636