Q42PGB - Horngren'S Financial And Managerial Accounting

Question

Analyzing and journalizing bond transactions

On January 1, 2018, Electricians Credit Union (ECU) issued 8%, 20-year bonds payable with face value of $400,000. The bonds pay interest on June 30 and December 31. The issue price of the bonds is 104.

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 $416,000, 8% bond payable credited by $400,000 and premium on bond payable credited by $16,000. 

Step 1: Definition of bonds payable

A bond is a type of long-term debt that large companies issue to fulfill cash requirements.

Step 2: Entry for the issue of bonds payable

Date	Particulars	Debit	Credit
January 1, 2018	Cash	$416,000
	8% Bonds Payable		$400,000
	Premium on Bonds Payable		$16,000
	(Being entry for the issue of bonds)

Step 3: Payment of semi-annual interest and premium amortization

Date	Particulars	Debit	Credit
June 30, 2018	Interest Expense	$16,000
	Premium on bonds	$400
	Cash		$16,400
	(Being entry for the payment of interest)

$\begin{array}{c}\mathrm{Semi}-\mathrm{Annual}\hspace{0.17em}\hspace{0.17em}\mathrm{Interest}=\frac{\text{Face\hspace{0.17em}Value×\hspace{0.17em}Interest\hspace{0.17em}\hspace{0.17em}rate×\hspace{0.17em}time\hspace{0.17em}preiod}}{\text{12}}\\ =\frac{\$400,000\times \hspace{0.17em}8\%\hspace{0.17em}\times \hspace{0.17em}6}{\text{12}}\\ =\text{\$16,000}\end{array}$

Step 4: Payment of semi-annual interest and premium amortization

Date	Particulars	Debit	Credit
December 31, 2018	Interest Expense	$16,000
	Premium on bonds	$400
	Cash		$16,400
	(Being entry for the payment of interest)

$\begin{array}{c}\text{Semi-Annual\hspace{0.17em}\hspace{0.17em}Interest}=\frac{\text{Face\hspace{0.17em}Value×\hspace{0.17em}Interest\hspace{0.17em}\hspace{0.17em}rate×\hspace{0.17em}time\hspace{0.17em}preiod}}{\text{12}}\\ =\hspace{0.17em}\frac{\text{\$400,000×\hspace{0.17em}}8\text{\%\hspace{0.17em}×\hspace{0.17em}6}}{\text{12}}\\ =\text{\$16,000}\end{array}$

Step 5: Maturity of the bonds

Date	Particulars	Debit	Credit
December 31, 2037	8% Bonds Payable	$400,000
	Cash		$400,000
	(Being entry for the retirement of bonds)