On February 1, 2011, Wolf Inc. issued 10% bonds dated February 1, 2011, with a f

Question

On February 1, 2011, Wolf Inc. issued 10% bonds dated February 1, 2011, with a face amount of $200,000. The bonds sold for $239,588 and mature in 20 years. The effective interest rate for these bonds was 8%. Interest is paid semiannually on July 31 and January 31. Wolf's fiscal year is the calendar year. Wolf uses the effective interest method of amortization. Required:
1. Prepare the journal entry to record the bond issuance on February 1, 2011.
2. Prepare the entry to record interest on July 31, 2011.
3. Prepare the necessary journal entry on December 31, 2011.
4. Prepare the necessary journal entry on January 31, 2012.

Explanation / Answer

AMORTIZATION TABLE DATE CASH INTEREST PREMIUM BOOK VALUE OF INTEREST @10% EXPENSE @8% AMORTIZED BONDS AT END 1-Feb-11 239588 July31 2011 10,000 9584 416 239172 Jan 1 2011 10000 9567 433 238739 JOURNAL ENTRIES: Date Accounts title and Explanations Debit $ Credit $ Feb 1 2011 Cash Account Dr. 239588     Bonds payable 200000     Premium on Bonds payable 39588 (for bonds issued) 31-Jul-11 Premium on Bonds payable Dr. 416 Interest Expense Dr. 9584     Cash Account 10000 (for semi annual interest paid) 31-Dec-11 Premium on bonds payable Dr (433/6*5) 361 Interest Expense (9567/6*5) 7972       Interest Expense Payable (10000/6*5) 8333 (for Interest expense due for 5 months at the end of year) 31-Jan-12 Premium on Bonds payable Dr. (433/6*1) 72 Interest expense Dr. (9567/6*1) 1595 Interest expense Payable Dr. 8333      Cash Account 10000 Note: On dec 31, 2011 , Interest expense is due for 5 months. Therefore, each premium and Interest expense has been proportionately reduced for 5 months

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