Q35PGA_b - 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

Interest expense debited by $40,000, premium on bonds debited by $2,250 and cash credited by $42,250.

Step 1: Definition of bond premium

Bond premium is the situation when the issued price of the bond is higher than the face value of the bond.

Step 2: Entry for the issue of bonds payable

Date	Particulars	Debit	Credit
June 30, 2018	Interest Expense	$40,000
	Premium on bonds	$2,250
	Cash		$42,250
	(Being entry for the payment of interest)

$\begin{array}{c}\text{Semi-Annual\hspace{0.17em}\hspace{0.17em}Interest}=\frac{\text{Face\hspace{0.17em}Value×\hspace{0.17em}Interest\hspace{0.17em}\hspace{0.17em}rate×\hspace{0.17em}time\hspace{0.17em}preiod}}{\text{12}}\\ =\frac{\text{\$1,000,000×\hspace{0.17em}}8\text{\%\hspace{0.17em}×\hspace{0.17em}6}}{\text{12}}\\ =\text{\$40,000}\end{array}$