polk incorporated issued 260,000 of 13% bonds on July 1, 2013, for $268,842.07.
ID: 2479267 • Letter: P
Question
polk incorporated issued 260,000 of 13% bonds on July 1, 2013, for $268,842.07. The bonds were dated January 1, 2013, pay interest on each June 30 and December 31, are due December 31, 2017, and were issued to yield 12%. Polk uses the effective interest method of amortization.Prepare the journal entries to record the issue of the bonds on July 1. 2013, and the interest payments on December 31, 2013, and June 30, 2014. polk incorporated issued 260,000 of 13% bonds on July 1, 2013, for $268,842.07. The bonds were dated January 1, 2013, pay interest on each June 30 and December 31, are due December 31, 2017, and were issued to yield 12%. Polk uses the effective interest method of amortization.
Prepare the journal entries to record the issue of the bonds on July 1. 2013, and the interest payments on December 31, 2013, and June 30, 2014. polk incorporated issued 260,000 of 13% bonds on July 1, 2013, for $268,842.07. The bonds were dated January 1, 2013, pay interest on each June 30 and December 31, are due December 31, 2017, and were issued to yield 12%. Polk uses the effective interest method of amortization.
Prepare the journal entries to record the issue of the bonds on July 1. 2013, and the interest payments on December 31, 2013, and June 30, 2014.
Explanation / Answer
Solution:
Par Value of the bonds = $260,000
Semi Annual Coupon Interest = $260,000*13%x1/2 = $16,900
Issue Price of the bonds = $268,842.07
Since Issue price is higher than Par Value, Bonds are issued at Premium.
Premium on Bonds Payable = $268,842.07 - $260,000 = 8,842.07
The premium on discount payable is to be amortized over the life of the bond by using effective interest method.
Effective Interest Rate (Yield to Maturity) = 12% per annum or 6% semi annually
Bond Premium Amortization Schedule for the first 2 interest periods (Effective Interest Method)
Date
Interest Payable
Interest Expenses (Book Value of bonds at the beginning of year @ 6% effective interest rate)
Amortization of Premium on Bonds Payable (Interest Payable - Interest Expenses)
Premium on Bonds Payable Ending Balance
Par Value of Bonds
Book Value of the bonds at the end of year
July 1, 2013
$0
$0
$8,842
$260,000
$268,842
Dec 31, 2013
$16,900
$16,131
$769
$8,073
$260,000
$268,073
June 30, 2014
$16,900
$16,084
$816
$7,257
$260,000
$267,257
Journal Entries to record the transactions
Date
Account Title
Debit
Credit
July 1, 2013
Cash A/c Dr.
$268,842.07
To Bonds Payable
$260,000
To Premium on Bonds Payable
8,842.07
(Being bonds are issued at premium)
Dec 31, 2013
Interest Expenses Dr.
$16,131
Premium on Bonds Payable Dr.
$769
To Interest Payable to Bond Holders
$16,900
(Being interest expenses are recorded)
Dec 31, 2013
Interest Payable To bond holders Dr.
$16,900
TO Cash
$16,900
(Being Interest paid to bondholders)
June 30, 2014
Interest Expenses Dr.
$16,084
Premium on Bonds Payable Dr.
$816
To Interest Payable to Bond Holders
$16,900
(Being interest expenses are recorded)
June 30, 2014
Interest Payable To bond holders Dr.
$16,900
TO Cash
$16,900
(Being Interest paid to bondholders)
Bond Premium Amortization Schedule for the first 2 interest periods (Effective Interest Method)
Date
Interest Payable
Interest Expenses (Book Value of bonds at the beginning of year @ 6% effective interest rate)
Amortization of Premium on Bonds Payable (Interest Payable - Interest Expenses)
Premium on Bonds Payable Ending Balance
Par Value of Bonds
Book Value of the bonds at the end of year
July 1, 2013
$0
$0
$8,842
$260,000
$268,842
Dec 31, 2013
$16,900
$16,131
$769
$8,073
$260,000
$268,073
June 30, 2014
$16,900
$16,084
$816
$7,257
$260,000
$267,257
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