Riverbed Company issued $540,000 of 10%, 20-year bonds on January 1, 2017, at 10

Question

Riverbed Company issued $540,000 of 10%, 20-year bonds on January 1, 2017, at 102. Interest is payable semiannually on July 1 and January 1 . Riverbed 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 intermediate calculations to 6 decimal places, e.g. 1.251247 and final answer 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.) (a) The issuance of the bonds. (b) The payment of interest and related amortization on July 1, 2017 (c) The accrual of interest and the related amortization on December 31, 2017 Date Account Titles and Explanation Debit Credit 1/1/17 Cash 550900 Premium on Bonds Payable 10800 Bonds Payable $40000 Interest Expense 26908 Premium on Bonds Payable 102 Cash 27010 12/31/17TInterest Expense 26903 Premium on Bonds Payable Interest Payable 27010

Explanation / Answer

On 1st july 2017

Bond face value = 540000. Upon this 6 months interest = 540000 * 10% * 1/2 = 27000.

This amount shall be credited to cash. We can call it as cash interest

Now how much of the bond premium to be amortized = Cash interest - Interest expenses

= 27000 - 26908 = 92

Interest expenses = carrying amount * Market rate of interest = 550800 * 9.7705% * 1/2= 26908

As on Dec 31

Now the carrying amount = 550800 - 92 already amortized = 550708

Bond premium amortization = 27000 - 550708 * 0.097705 * 1/2 = 27000 - 26903 = 97

Debit Credit Interest Expenses 26908 Bond premium amortization 92 Cash 27000

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