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Chapter 14: 4E (page 755)

Celine Dion company issued $600,000 of 10%, 20- year bonds on January 1, 2017, at 102. Interest is payable semiannually on July 1 and January 1. Dion company uses the straight-line method of amortization for bond premium or discount.

Instructions:

Prepare the journal entries to record the following.

  1. The issuance of the bonds.
  2. The payment of interest and the related amortization on July 1, 2017.
  3. The accrual of interest and the related amortization on December 31, 2017.

Short Answer

Expert verified

The premium on bond payable is $12,000

Step by step solution

01

Meaning of Journal

The journal entry is a way of recording the business transaction in the books of account. The journal entry is based on a double-entry system; therefore, a transaction affects a minimum of two accounts.

02

Showing journal entries

Date

Accounts and Explanation

Debit ($)

Credit ($)

Jan 1, 2017

Cash

612,000

Bonds Payable

600,000

Premium on Bonds Payable

12,000

(To record issue of bonds)





July 1, 2017

Interest Expense

29,700

Premium on Bonds Payable ($12,000/40)

300


Cash

30,000

(To record interest and premium amortization)





Dec 31, 2017

Interest Expense

29,700

Premium on Bonds Payable ($12,000/40)

300


Cash

30,00

(To record interest and premium amortization)

Note:

Premium on bonds payable $12,000 is for 20 years, and on July 1, 2017, the premium on bonds is amortized for six months; that鈥檚 why it is divided by 40 (20 years*2).

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Most popular questions from this chapter

E14-15 (L01,2) (Entries for Redemption and Issuance of Bonds) Jason Day Company had bonds outstanding with a maturity value of \(300,000. On April 30, 2017, when these bonds had an unamortized discount of \)10,000, they were called in at 104. To pay for these bonds, Day had issued other bonds a month earlier bearing a lower interest rate. The newly issued bonds had a life of 10 years. The new bonds were issued at 103 (face value $300,000).

Instructions

Ignoring interest, compute the gain or loss, and record this refunding transaction. (AICPA adapted)

Presented below are two independent situations.

(a) On January 1, 2017, Robin Wright Inc. purchased land that had an assessed value of \(350,000 at the time of purchase. A \)550,000, zero-interest-bearing note due January 1, 2020, was given in exchange. There was no established exchange price for the land, nor a ready fair value for the note. The interest rate charged on a note of this type is 12%. Determine at what amount the land should be recorded at January 1, 2017, and the interest expense to be reported in 2017 related to this transaction.

(b) On January 1, 2017, Field Furniture Co. borrowed $5,000,000 (face value) from Gary Sinise Co., a major customer, through a zero-interest-bearing note due in 4 years. Because the note was zero-interest-bearing, Field Furniture agreed to sell furniture to this customer at lower than market price. A 10% rate of interest is normally charged on this type of loan. Prepare the journal entry to record this transaction and determine the amount of interest expense to report for 2017.

Using the same information as in E14-22 and E14-24, answer the following questions related to American Bank (creditor).

Instructions

  1. Compute the loss American Bank will suffer under this new term modification. Prepare the journal entry to record the loss on American鈥檚 books.
  2. Prepare the interest receipt schedule for American Bank after the debt restructuring.
  3. Prepare the interest receipt entry for American Bank on December 31, 2018, 2019, and 2020.
  4. What entry should American Bank make on January 1, 2021?

Determine Proper Amounts in Account Balances) Presented below are two independent situations.

(a) George Gershwin Co. sold \(2,000,000 of 10%, 10-year bonds at 104 on January 1, 2017. The bonds were dated January 1, 2017, and pay interest on July 1 and January 1. If Gershwin uses the straight-line method to amortize bond premium or discount, determine the amount of interest expense to be reported on July 1, 2017, and December 31, 2017.

(b) Ron Kenoly Inc. issued \)600,000 of 9%, 10-year bonds on June 30, 2017, for $562,500. This price provided a yield of 10% on the bonds. Interest is payable semiannually on December 31 and June 30. If Kenoly uses the effective interest method, determine the amount of interest expense to record if financial statements are issued on October 31, 2017.

Question: Zopf Company sells its bonds at a premium and applies the effective-interest method in amortizing the premium. Will the annual interest expense increase or decrease over the life of the bonds? Explain.

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