Record the appropriate journal entry to reflect the following: Bonds payable inf

Question

Record the appropriate journal entry to reflect the following: Bonds payable info: The principal amount (a.k.a. face value, par value, stated value) of these bonds $150,000. These bonds have a 10 year term. The stated rate (a.k.a. contract rate, nominal rate, contract rate) of interest on these bonds 5%. Theses bonds are dated July 1, 200. (current year) and were sold on July 1. 20)0X (current year) for the sum of $156.000. Interest on these bonds is to be paid semi-annually on January 1 and July 1 of each year. An entry needs to be made for December 31's accrued interest due and for the appropriate amount relating to the amortization of the premium (use straight-line amortization for this premium). A check will be written and issued for the appropriate amount of interest due on January 1. (Check out your textbook pages 594-597) Veggies-R-Us. Trial Balance December 31, 20xx Account Title Debit Credit Cash Accounts receivable Allowance for doubtful accounts Prepaid rent $26.750 47.630 250 1,680 8,700 113,520 15,350 Supplies Investments Furniture Accumulated depreciation- furniture Equipment Accumulated depreciation equipment Building Accumulated depreciation- building Accounts payable Salary payable Unearned revenue, customer 12,800 44,600 1.930 89.90028.600 6,240 25,500

Explanation / Answer

1. On the date of issue of bonds i.e. July 1, 20xx, the firm will have to record the proceeds by debiting Bank with $156,000 and crediting the Bonds Payable with $150,000 and crediting the Premium on Bonds payable as $6,000.

2. Since the bond term is 10 years; On december 31, 20xx, Firm will have to record the accrued interest expense as per the Accrual system of Accounting. For 6 months, Interest would be $150,000*5%*6/12= $3,750

3. Premium collected on Bonds will be amortized on a straight line over the span of Bond life. For current year $300 (6000/10*6/12) will be amortized.

Accounting Entry would be recorded as:

Interest Expense debited with $3,450

Premium on Bonds Payable debited with $300

Interest Payable(Liability) credited with $3,750.

4. Whenver the bonds are issued at premium, Premium on Bonds collected is a form of excessive interest which will be amortized over the Bond life making the interest expense low for company for subsequent years

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