Problem 3 (15 Points) William Arms Company issued $800,000 of 10%, 5-year bond a

Question

Problem 3 (15 Points) William Arms Company issued $800,000 of 10%, 5-year bond at a price of semiannually, and the straight-line method is used for amortization Instructions: 104. Interest is paid 1. What amount was received for the bond? Give the journal entry for the issuance 2. How much cash interest is paid each semiannual interest period? 3. Give the semiannual journal entry to recognize the cash payment for interest, the bond interest expense, and the debit/credit for amortizing the discount/premium on the bond payable

Explanation / Answer

1. Amount received for the bond = ($800,000/100) * 104

= $832,000.

Journal Entry:

Bank A/c Dr $832,000

To Premium on issue of bond $32,000

To 10% Bond $800,000

2.

Cash Interest paid for each semi annual interest period = $800,000 * 10% * 6/12

= $80,000 * 1/2

= $40,000.

3.

Journal Entries:

Interst Expense A/c Dr $46,800

Premium on issue of bond A/c Dr $3,200 (32,000/(5*2))

To Interest Payable A/c $40,000

Interest Payable A/c Dr $40,000

To Cash / Bank A/c $40,000

Profit and Loss A/c Dr $36,800

To Interest Expense A/c $36,800

Amount debited to Premium on issue of debentures is $3,200.

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