Q8SE_1 - Horngren'S Financial And Managerial Accounting

Question

Journalizing bond transactions

Wilkes Mutual Insurance Company issued a $100,000, 5%, 10-year bond payable at

111 on January 1, 2018. Interest is paid semiannually on January 1 and July 1.

Requirements

1. Journalize the issuance of the bond payable on January 1, 2018.

2. Journalize the payment of semiannual interest and amortization of the bond

discount or premium on July 1, 2018.

Step-by-Step Solution

Answer

1. The cash account is debited with $111,000 and the 5% bonds payable account is credited with $111,000.
2. The interest expense account is debited with $1,950, the premium on bonds payable account is debited with $550 and the cash account is credited with $2,500.

Step 1: Journal Entry for the issue of bond

Date	Particulars	Debit	Credit
January 1, 2018	Cash	$111,000
	Premium on bonds payable		$11,000
	5% Bonds Payable		$100,000
	(Being Entry of the issue of bonds)

Step 2: Calculation of premium on bonds payable:

$\begin{array}{c}\mathrm{Issue} \mathrm{Price}=\mathrm{Par} \mathrm{Value}\times \frac{\mathrm{\$}111}{100}\\ =\mathrm{\$}100,000\times \frac{\mathrm{\$}103}{100}\\ =\mathrm{\$}111,000\end{array}$

$\begin{array}{c}\mathrm{Premium} \mathrm{on} \mathrm{Bonds} \mathrm{Payable}=\mathrm{Issue} \mathrm{Price}-\mathrm{Par} \mathrm{Value}\\ =\mathrm{\$}111,000-\mathrm{\$}100,000\\ =\mathrm{\$}11,000\end{array}$

Step 3: Journal Entry to record interest expenses:

Date	Particulars	Debit	Credit
July 1, 2018	Interest Expense	$1,950
	Premium on Bonds Payable	$550
	Cash		$2,500
	(Being Entry of the payment of interest)

$\begin{array}{c}\mathrm{Coupon} \mathrm{Amount}=\mathrm{Par} \mathrm{Value}\times \mathrm{Coupon} \mathrm{Rate}\times \mathrm{Time} \mathrm{Period}\\ =\mathrm{\$}100,000\times 5\mathrm{\%}\times \frac{6}{12}\\ =\mathrm{\$}2,500\end{array}$

$\begin{array}{c}\mathrm{Premium} \mathrm{Amortize}=\frac{\mathrm{Premiumon} \mathrm{Bonds} \mathrm{Payable}}{\text{Semi-annual Period}}\\ =\frac{\mathrm{\$}11,000}{10\times 2}\\ =\mathrm{\$}550\end{array}$

$\begin{array}{c}\mathrm{Interest} \mathrm{Expenses}=\mathrm{Coupon} \mathrm{Amount}-\mathrm{Premium} \mathrm{on} \mathrm{Bond} \mathrm{Amortized}\\ =\mathrm{\$}2,500-\mathrm{\$}550\\ =\mathrm{\$}1,950\end{array}$