Q25SE_1 - Horngren'S Financial And Managerial Accounting

Question

Journalizing bond issuance and interest payments

On January 1, 2018, Roberts Unlimited issues 8%, 20-year bonds payable with aface value of $240,000. The bonds are issued at 104 and pay interest on June 30 andDecember 31.

Requirements

1. Journalize the issuance of the bonds on January 1, 2018.

2. Journalize the semiannual interest payment and amortization of bond premium onJune 30, 2018.

3. Journalize the semiannual interest payment and amortization of bond premium onDecember 31, 2018.

4. Journalize the retirement of the bond at maturity, assuming the last interest paymenthas already been recorded. (Give the date).

Step-by-Step Solution

Answer

1. The cash account is debited with $249,600. The premium on the bonds payable account is credited with $9,600, and the bonds payable account is credited with $240,000.
2. Interest expenses and premium on bonds payable debited by $9,600 and $240. The cash credited by $9,840.
3. Interest expenses and premium on bonds payable debited by $9,600 and $240. The cash credited by $9,840
4. Bonds payable debited by $240,000 and cash is credited by $240,000.

Step 1: Definition of bonds issue on premium

When the bonds are issued greater than the market interest rate, then the bonds are known as the bond issue on premium.

Step 2: Journal entry for the issue of bond (1)

Date	Particulars	Debit	Credit
January 1, 2018	Cash	$249,600
	Premium on Bonds Payable		$9,600
	Bonds Payable		$240,000
	(To record the issue of bonds)

 

Calculation of premium on bond:

$\begin{array}{c}\mathbf{PremiumonBond}\mathbf{=}\mathbf{IssuedPrice}\mathbf{-}\mathbf{ParValue}\\ \mathbf{=}\mathbf{\$}\mathbf{249}\mathbf{,}\mathbf{600}\mathbf{-}\mathbf{\$}\mathbf{240}\mathbf{,}\mathbf{000}\\ \mathbf{=}\mathbf{\$}\mathbf{9}\mathbf{,}\mathbf{600}\end{array}$

Step 3: Journal entry for the semi-annual interest and amortization of premium:

Date	Particulars	Debit	Credit
June 30, 2018	Interest Expense	$9,600
	Premium on Bonds	$240
	Cash		$9,840
	(To record the payment of interest)

 $\begin{array}{c}\mathbf{C}\mathbf{o}\mathbf{u}\mathbf{p}\mathbf{o}\mathbf{n}\mathbf{=}\mathbf{P}\mathbf{a}\mathbf{r}\mathbf{V}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}\mathbf{\times }\mathbf{C}\mathbf{o}\mathbf{u}\mathbf{p}\mathbf{o}\mathbf{n}\mathbf{R}\mathbf{a}\mathbf{t}\mathbf{e}\mathbf{\times }\mathbf{T}\mathbf{i}\mathbf{m}\mathbf{e}\mathbf{P}\mathbf{e}\mathbf{r}\mathbf{i}\mathbf{o}\mathbf{d}\\ \mathbf{=}\mathbf{\$}\mathbf{240}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{8}\mathbf{\%}\mathbf{\times }\frac{\mathbf{6}}{\mathbf{12}}\\ \mathbf{=}\mathbf{\$}\mathbf{9}\mathbf{,}\mathbf{600}\end{array}$

$\begin{array}{c}\mathbf{P}\mathbf{r}\mathbf{e}\mathbf{m}\mathbf{i}\mathbf{u}\mathbf{m}\mathbf{o}\mathbf{n}\mathbf{B}\mathbf{o}\mathbf{n}\mathbf{d}\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{r}\mathbf{t}\mathbf{i}\mathbf{z}\mathbf{e}\mathbf{d}\mathbf{=}\frac{\mathbf{P}\mathbf{r}\mathbf{e}\mathbf{m}\mathbf{i}\mathbf{u}\mathbf{m}\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}}{\mathbf{S}\mathbf{e}\mathbf{m}\mathbf{i}\mathbf{-}\mathbf{a}\mathbf{n}\mathbf{n}\mathbf{u}\mathbf{a}\mathbf{l}\mathbf{P}\mathbf{e}\mathbf{r}\mathbf{i}\mathbf{o}\mathbf{d}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{9}\mathbf{,}\mathbf{600}}{\mathbf{20}\mathbf{\times }\mathbf{2}}\\ \mathbf{=}\mathbf{\$}\mathbf{240}\end{array}$

Step 4: Journal entry for the interest expense

Date	Particulars	Debit	Credit
December 31, 2018	Interest Expense	$9,600
	Premium on Bonds	$240
	Cash		$9,840
	(To record the payment of interest)

 

Step 5: Journal entry for the at bond maturity

Date	Particulars	Debit	Credit
	Bonds payable	$240,000
	Premium on Bonds		$240,000
	(To record the redemption of bond)