(Entries for Bond Transactions) On January 1, 2010, Osborn Company sold 12% bond

ID: 2383829 • Letter: #

Question

(Entries for Bond Transactions)

On January 1, 2010, Osborn Company sold 12% bonds having a maturity value of $800,000 for $860,651.79 which provides the bondholders with a 10% yield. The bonds are dated January 1, 2010, and mature January 1, 2015, with interest payable December 31 of each year. Osborn Company allocates interest and unamortized discount or premium on the effective interest basis.

(a) Prepare the journal entry at the date of the bond issuance. (Round answers to 2 decimal places, e.g. 12,550.20.)

Description/Account Debit Credit

(b) Prepare a schedule of interest expense and bond amortization for 2010-2012. (For each entry in schedule round your answer to 2 decimal places, e.g. 25, 520.20. Use the rounded amount for your calculation of the next entry. When using a calculator, you must alter the value in the calculator window (memory) to the rounded amount.)

Schedule of Interest and Expense and Bond Premium Amortization
Effective Interest Method
12% Bonds Sold to Yield 10%

Date

Cash Paid

Interest Expense

Premium Amortized

Carrying Amt. of Bonds

1/1/10 $
12/31/10 $ $ $
12/31/11
12/31/12

(c) Prepare the journal entry to record the interest payment and the amortization for 2010.

December 31, 2010

Description/Account Debit Credit

(d) Prepare the journal entry to record the interest payment and the amortization for 2012.

December 31, 2012

Description/Account Debit Credit

Explanation / Answer

(a)

Debit: Cash 860,651.79

Credit: Bonds Payable 800,000.00

Credit: Premium on Bonds Payable 60,651.79

Description: Sales of bonds at premium

(b)

Date

1/1/10

12/31/10

12/31/11

12/31/12

Cash Paid

96,000.00

Interest Expense

86,065.18

85,071.70

83,978.87

Premium amort.

9,934.82

10,928.30

12,021.13

Carrying amt. of

860,651.79

850,716.97

839,788.67

827,767.54

****Note: Cash paid is found by taking the maturity value (800,000) and multiplying it by the bond interest rate (12%). Interest expense is found by taking the current carrying value of the bond and multiplying it by the market rate (10%). The premium amortized is the difference between the cash paid and the interest expense.

For example for the last year in the above schedule, 12/31/2012, cash paid = 800,000*0.12 = 96,000. Interest expense = 839,788.67*0.10 = 83,978.87. Premium amortized = 96,000.00 – 83,978.87 = 12,021.13.

(c)

December 31, 2010

Description/Account Debit Credit

Debit: Bond interest expense 86,065.18

Debit: Premium on bonds payable 9,934.82

Credit: Cash 96,000.00

Description: to record interest and premium amortization

(d)

December 31, 2012

Description/Account Debit Credit

Debit: Bond Interest expense 83,978.87

Debit: Premium on bonds payable 12,021.13

Credit: Cash 96,000.00

Description: to record interest and premium amortization