Berol Corporation sold 20-year bonds on January 1, 2012. The face value of the b

Question

Berol Corporation sold 20-year bonds on January 1, 2012. The face value of the bonds was $100,000, and they carry a 9% stated rate of interest, which is paid on December 31 of every year. Berol received $109,862 in return for the issuance of the bonds when the market rate was 8%. Any premium or discount is amortized using the straight-line interest method.

1.)Prepare the journal entry to record the sale of the bonds on January 1, 2012, and the proper balance sheet presentation on this date.

2.) Prepare the journal entry to record interest expense on December 31, 2012, and the proper balance sheet presentation on this date.

3.) Explain why the company was able to issue the bonds for $109,862 rather than for the face amount.

Explanation / Answer

1)

2)

Amortization of premium per year = 9862 / 20 = $493.10

Interest expense = Interest payable - premium on bonds payable = $100000 x 9% - $493.10 = $8506.90

3) The interest offered by the bond (9%) is more than the market rate of interest (8%). There fore the bonds have been issued at premium.

Account Title and Explanation Debit ($) Credit ($) Cash $ 1,09,862.00 Premiun on Bonds Payable $       9,862.00 Bonds Payable $ 1,00,000.00

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