Chapter 12: Q8SE_1 (page 656)

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.

Short Answer

Expert verified

The cash account is debited with $111,000 and the 5% bonds payable account is credited with $111,000.
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 by step solution

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)

Calculation of premium on bonds payable:

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

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

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

$\begin{matrix} Premium Amortize = \frac{Premiumon Bonds Payable}{Semi-annualPeriod} \\ = \frac{$ 11, 000}{10 \times 2} \\ = $ 550 \end{matrix}$

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

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Short Answer

Step by step solution

Journal Entry for the issue of bond

Calculation of premium on bonds payable:

Journal Entry to record interest expenses:

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