BONDS ISSUED AT A PREMIUM Wang Corporation issued the following bonds at a premium:
Date of issue and sale: ………..March 1, 20-1
Principal amount: ……………..$250,000
Sale price of bonds: …………...103
Denomination of bonds: ………$500
Life of bonds: …………………20 years
Stated rate: ……………………12%, payable semiannually on August
…………………………………31 and February 28
REQUIRED
1. Prepare journal entries for:
(a) Issuance of the bonds at a premium.
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(b) Interest payment and premium amortization on the bonds on August 31, 20-1.
(c) Year-end adjustment on the bonds for 20-1.
(d) Reversing entry for the beginning of 20-2.
(e) Interest payments and premium amortization on the bonds for 20-2
(February 28 and August 31).
2. Calculate the carrying value of the bonds on August 31, 20-2.
SOLUTION
1.
GENERAL JOURNAL
| date | date | description | post. ref. | debit | debit | debit | debit | debit | credit | credit | credit | credit | credit |
|---|
| 20-1 Mar. | 1 | Cash | | 257 | 5 | 0 | 0 | 00 | | | | | |
| | Bonds Payable | | | | | | | 250 | 0 | 0 | 0 | 00 |
| | Premium on Bonds Payable | | | | | | | 7 | 5 | 0 | 0 | 00 |
| Aug. | 31 | Bond Interest Expense | | 14 | 8 | 1 | 2 | 50 | | | | | |
| | Premium on Bonds Payable | | | 1 | 8 | 7 | 50 | | | | | |
| | Cash | | | | | | | 15 | 0 | 0 | 0 | 00 |
| | Premium amortization: $7,500/40 | | | | | | | | | | | |
| | periods = $187.50 per period | | | | | | | | | | | |
| | Adjusting Entry | | | | | | | | | | | |
| Dec. | 31 | Bond Interest Expense | | 9 | 8 | 7 | 5 | 00 | | | | | |
| | Premium on Bonds Payable | | | 1 | 2 | 5 | 00 | | | | | |
| | Bond Interest Payable | | | | | | | 10 | 0 | 0 | 0 | 00 |
| | Reversing Entry | | | | | | | | | | | |
| 20-2 Jan. | 1 | Bond Interest Payable | | 10 | 0 | 0 | 0 | 00 | | | | | |
| | Bond Interest Expense | | | | | | | 9 | 8 | 7 | 5 | 00 |
| | Premium on Bonds Payable | | | | | | | | 1 | 2 | 5 | 00 |
| Feb. | 28 | Bond Interest Expense | | 14 | 8 | 1 | 2 | 50 | | | | | |
| | Premium on Bonds Payable | | | 1 | 8 | 7 | 50 | | | | | |
| | Cash | | | | | | | 15 | 0 | 0 | 0 | 00 |
| Aug. | 31 | Bond Interest Expense | | 14 | 8 | 1 | 2 | 50 | | | | | |
| | Premium on Bonds Payable | | | 1 | 8 | 7 | 50 | | | | | |
| | Cash | | | | | | | 15 | 0 | 0 | 0 | 00 |
2.
| Interest | Premium on | | Bonds | Premium on | Carrying |
|---|
| Expense | Bonds Pay. | Cash | Payable | Bonds Pay. | Value of |
| Date | Dr. | Dr. | Cr. | Balance | Balance | Bonds |
| 3/1/–1 | | | | 250,000 | 7,500.00 | 257,500.00 |
| 8/31/–1 | 14,812.50 | 187.50 | 15,000 | 250,000 | 7,312.50 | 257,312.50 |
| 2/28/–2 | 14,812.50 | 187.50 | 15,000 | 250,000 | 7,125.00 | 257,125.00 |
| 8/31/–2 | 14,812.50 | 187.50 | 15,000 | 250,000 | 6,937.50 | 256,937.50 |