The Wille Company issued a $4,000,000, 10-year bond on January 1st of last year.

Question

The Wille Company issued a $4,000,000, 10-year bond on January 1st of last year. The bond was sold at 1 15. The stated rate is 8% (compounded semi- annually) while the market rate was 6%. On June 1st of this year, the company redeemed $100,000 worth of bonds at 109. REQUIRED: Journalize the entries to 1) issue the bonds on January 1st, 2) record the first bond interest payment and bond amortization on July 1s, 3) record the second bond interest payment and bond amortization on December 31st, and 4) redeem the bonds on June 1st.

Explanation / Answer

Solution:

It is assumed that company is using straight line method for bond premium amortization.

Journal Entries - Wille Company Event Date Particulars Debit Credit 1 Year 1, Jan 1 Cash Dr $4,600,000.00          To Bond Payable $4,000,000.00          To Premium on Bond Payable $600,000.00 (To Record issue of bond) 2 Year 1, Jul 1 Interest Expense Dr $130,000.00 Premium on bond payable Dr $30,000.00          To Cash $160,000.00 (To record interest payment and premium amortization) 3 Year 1, Dec 31 Interest Expense Dr $130,000.00 Premium on bond payable Dr $8,000.00          To Cash $160,000.00 (To record interest payment and premium amortization) 4a Year 2, June 1 Interest Expense Dr $2,708.00 Premium on bond payable Dr ($15,000/10*5/12) $625.00          To Cash ($100,000*8%*5/12) $3,333.00 (To record interest payment and premium amortization) 4b Year 2, June 1 Bond Payable Dr $100,000.00 Premium on bond payable Dr ($15,000-$2,125) $12,875.00          To Cash $109,000.00          To Gain on redemption of bond $3,875.00 (To record redemption of bond partially)

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