Celine Dion Company issued $864,000 of 10%, 20-year bonds on January 1, 2014, at

Question

Celine Dion Company issued $864,000 of 10%, 20-year bonds on January 1, 2014, at 102. Interest is payable semiannually on July 1 and January 1. Celine Dion Company uses the effective-interest method of amortization for bond premium or discount. Assume an effective yield of 9.7705%.

Prepare the journal entries to record the following. (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

No.

Account Titles and Explanation

Debit

Credit

(a) The issuance of the bonds. (b) The payment of interest and related amortization on July 1, 2014. (c) The accrual of interest and the related amortization on December 31, 2014.

Explanation / Answer

Solution:

Sale Proceeds from Bonds issued = $864,000 x 102/100 = $881,280

Face Value of Bonds = $864,000

Premium on Bonds Payable = Issue Price – Par Value = $881,280 - $864,000 = $17,280

Premium on Bonds Payable $17,280 is to be amortized during the life of the bonds.

No of times interest payment during the life of bond = 20 years x 2 = 40 times

The amount of amortization of Premium on Bonds Payable on each interest payment = $17,280 / 40 = $432

The amount of cash interest on Bonds Payable to be paid to bond holders each time July 1 and January 1 = $864,000 x 10% x ½ = $43,200

Journal Entry

No.

Account Titles and Explanation

Debit

Credit

1/1/14

Cash A/c      Dr.

$881,280

   To Bonds Payable

$864,000

   To Premium on Bonds Payable

$17,280

7/1/14

Interest Expenses    Dr. ($881,280 x 9.7705% x ½)

$43,053

Amortization of Premium on Bonds Payable Dr.

$147

   To Cash Interest Payable

$43,200

12/31/14

Interest Expenses    Dr. ($881,280 x 9.7705% x ½)

$43,046

Amortization of Premium on Bonds Payable Dr.

$154

   To Cash Interest Payable

$43,200

Calculation of Interest Expenses

7/1/14 ---- as per effective interest method, interest expenses is recorded on the basis of beginning book value in Bonds Payable Account:

Interest Expenses on 7/1/14 = $881,280 x 9.7705% x ½ = $43,053

Interest Expenses on 12/31/14 = ($881,280 - $147)*9.7705% x ½ = $43,046

No.

Account Titles and Explanation

Debit

Credit

1/1/14

Cash A/c      Dr.

$881,280

   To Bonds Payable

$864,000

   To Premium on Bonds Payable

$17,280

7/1/14

Interest Expenses    Dr. ($881,280 x 9.7705% x ½)

$43,053

Amortization of Premium on Bonds Payable Dr.

$147

   To Cash Interest Payable

$43,200

12/31/14

Interest Expenses    Dr. ($881,280 x 9.7705% x ½)

$43,046

Amortization of Premium on Bonds Payable Dr.

$154

   To Cash Interest Payable

$43,200

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