In each of the following independent cases, the company closes its books on December 31.

1. Sanford Co. sells \(500,000 of 10% bonds on March 1, 2017. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2020. The bonds yield 12%. Give entries through December 31, 2018.

2. Titania Co. sells \)400,000 of 12% bonds on June 1, 2017. The bonds pay interest on December 1 and June 1. The due date of the bonds is June 1, 2021. The bonds yield 10%. On October 1, 2018, Titania buys back \(120,000 worth of bonds for \)126,000 (includes accrued interest). Give entries through December 1, 2019.

Instructions

For the two cases prepare all of the relevant journal entries from the time of sale until the date indicated. Use the effective-interest method for discount and premium amortization (construct amortization tables where applicable). Amortize premium or discount on interest dates and at year-end. (Assume that no reversing entries were made.)

Date

Accounts and Explanation

Debit ($)

Credit ($)

1 March 2017

Cash

$472,083

Discount on bond payable

$27,917

Bonds payable

$500,000

1 Sep 2017

Interest expenses

$28,325

Discount on bond payable

$3,325

Cash

$25,000

31 Dec 2017

Interest expenses

$19,017

Discount on bond payable

$\left(\$3,525\times \frac{4}{6}\right)$

$2,350

Interest payable

$\left(\$25,000\times \frac{4}{6}\right)$

$16,667

1 March 2018

Interest expenses

$9,508

Interest payable

$16,667

Discount on bond payable

$1,175

Cash

$25,000

1 Sep 2018

Interest expenses

$28,736

Discount on bond payable

$3,736

Cash

$25,000

31 Dec 2018

Interest expenses

$\left(\frac{\$28,960}{6}\times 4\right)$

19,307

Discount on bond payable

$\left(\frac{\$3,960}{6}\times 4\right)$

2,640

Interest payable

$\left(\frac{\$25,000}{6}\times 4\right)$

$16,667

Date

Interest on bond payable at stated rate (5%)

Interest on book value at market rate (6%)

Amortized discount

Unamortized Discount

Bond payable

Book value

1 March 2017

$27,917

$500,000

$472,083

1 Sep 2017

$25,000

$28,325

3,325

24,592

$500,000

475408

1 March 2018

25,000

28,525

3,525

21,067

$500,000

478,933

1 Sep 2018

25,000

28,736

3,736

17,331

$500,000

482,669

1 March 2019

25,000

28,960

3,960

13,371

$500,000

486,629

Particular

Amount $

Maturity value

$500,000

Less: present value of bonds payable ($500,000, n=7 @6%)

(332,500)

Less: Present value of interest ($25,000n=7 @6%)

(139,583)

Discount on bonds issued

$27,917

Date

Accounts and Explanation

Debit $

Credit $

1 June 2017

Cash

$425,856

Premium on bonds payable

$25,856

Bonds payable

$400,000

1 Dec 2017

Interest expenses

$21,293

Premium on bond payable

$2,707

Cash

$24,000

31 Dec 2017

Interest expenses $\left(\$21,157\times \frac{1}{6}\right)$

$3,526

Premium on bond payable

$\left(\$2,843\times \frac{1}{6}\right)$

$474

Interest payable

$\left(\$24,000\times \frac{1}{6}\right)$

4,000

1 June 2018

Interest expenses

$17,631

Interest payable

$4,000

Premium on bond payable

$\left(\$2,843\times \frac{5}{6}\right)$

$2,369

Cash

$24,000

1 Oct 2018

Interest expenses

$\left(\$21,015\times \frac{4}{6}\times \frac{\$120,000}{\$400,000}\right)$

$4,203

Premium on bond payable

$\left(\$2,985\times \frac{4}{6}\times \frac{\$120,000}{\$400,000}\right)$

$597

Cash

$4,800

1 Oct 2018

Bond payable

$120,000

Premium on bond payable

$5,495

Gain on redemption

$4,295

Cash

$121,200

1 Dec 2018

Interest expenses

$\left(\$21,015\times 70\%\right)$

$14,711

Premium on bond payable

$2,089

Cash role="math" localid="1659213160139" $(\$24,000\times 70\%)$

$16,800

31 Dec 2018

Interest expenses

$\left(\$20,866\times 70\%\times \frac{1}{6}\right)$

$2,432

Premium on bond payable

$\left(\$3,134\times 70\%\times \frac{1}{6}\right)$

$366

Interest payable

$\left(\$24,000\times 70\%\times \frac{1}{6}\right)$

$2,800

1 June 2019

Interest expenses

$\left(\$20,866\times 70\%\times \frac{5}{6}\right)$

$12,172

Interest payable

$2,800

Premium on bond payable

$\left(\$3,134\times 70\%\times \frac{5}{6}\right)$

$1,828

Cash

$16,800

1 Dec 2019

Interest expenses

$\left(\$20,709\times 70\%\right)$

$14,496

Premium on bond payable

$\left(\$3,291\times 70\%\right)$

$2,304

Cash $\left(\$24,000\times 70\%\right)$

16,800

Date

Interest on bond payable at the stated rate (6%)

Interest on book value at market rate (5%)

Amortized premium

Unamortized premium

Bond payable

Book value

1 June 2017

$25,856

$400,000

$425,856

1 Dec 2017

$24,000

$21,293

$2,707

$23,149

$400,000

$423,149

1 June 2018

$24,000

$21,157

$2,843

$20,306

$400,000

$420,306

1 Dec 2018

$24,000

$21,015

$2,985

$17,321

$400,000

$417,321

1 June 2019

$24,000

$20,866

$3,134

$14,187

$400,000

$414,187

1 Dec 2019

$24,000

$20,709

$3,291

$10,896

$400,000

$410,896

Particular

Amount $

Maturity value

$400,000

Less: Present value of the maturity value (n=8, r=5%)

(270,720)

Less: PVOAF of interest payable semi-annually (n=8, r=5%) (6.464)

(155,136)

Premium on bond payable

$25,856

Particular

Amount $

Reacquisition price$\left(\$126,000-\left(12\%\times \$120,000\times \frac{4}{12}\right)\right)$

$121,200

Carrying amount of the bonds redeemed

($120,000)

Unamortized premium

$\left[\left(\$25,856-\$2,707-\$2,843\right)\times 30\%\right]\mathbf{-}\mathbf{\$}\mathbf{597}$

($5,495)

Gain on redemption

$4,295