Q35PGA_a - Horngren'S Financial And Managerial Accounting

Question

Analyzing and journalizing bond transactions

On January 1, 2018, Educators Credit Union (ECU) issued 8%, 20-year bonds payable with face value of $1,000,000.These bonds pay interest on June 30 and December 31.The issue price of the bonds is 109.Journalize the following bond transactions:

a. Issuance of the bonds on January 1, 2018.

b. Payment of interest and amortization on June 30, 2018.

c. Payment of interest and amortization on December 31, 2018.

d. Retirement of the bond at maturity on December 31, 2037, assuming the last interest payment has already been recorded.

Step-by-Step Solution

Answer

Cash debited by $1,090,000, 8% bond payable credited by $1,000,000 and premium on bond payable credited by $90,000.

Step 1: Definition of bond issued at premium

The bonds will be issued at a premium because the stated interest rate is greater than the market interest rate 

Step 2: Entry for the issue of bonds payable

Date	Particulars	Debit	Credit
January 1, 2018	Cash	$1,090,000
	8% Bonds Payable		$1,000,000
	Premium on Bonds Payable		$90,000
	(Being entry for the issue of bonds)