Alpha had the following bond transactions during the fiscal year 2016: On Januar

Question

Alpha had the following bond transactions during the fiscal year 2016: On January 1: issued $10,000 of 6%, 5-year bonds at 102. Straight-line amortization method is used. Interest is payable semi-annual on July 1 and Jan 1. On July 1: issued $500,000 of 10%, 10-year bonds at 88.5. Straight-line amortization method is used. Interest is payable semi-annual on July 1 and Jan 1. On July 1: issued $10,000 of 8%, 10-year bonds for $10,853 cash. Straight-line amortization method is used. Interest is payable semi-annual on July 1 and Jan 1. Requirements: Prepare 3 separate journal entries for the issuance of the 3 bonds on Jan 1 and July 1. Prepare journal entry for the payment of interest on July 1 for the bonds issued on Jan 1, assuming no prior accrual (note: should also include amortization of the premium). Prepare separate journal entries for the accrual of interests on December 31 for all 3 bonds (should also include amortization of any premium or discount).

Explanation / Answer

Journal Entries:

Note:

1. Interest on bond 1 = .06*6/12*10,000 = 300

Interest on bond 2 = 0.10*6/12*500,000 = 25,000

Interest on bond 3 = 0.08*6/12*10,000 = 400

2. Premium on bond 1 to be amortized per period = 200/10 = 20 (No. of periods = No. of years*Frequency of interest = 5*2)

Discount on bond 2 to be amortized per period = 57500/20 = 2,875 (No. of periods = No. of years*Frequency of interest = 10*2)

Premium on bond 3 to be amortized per period = 853/20 = 42.65 (No. of periods = No. of years*Frequency of interest = 10*2)

Date Particulars Debit Credit 1. Journal Entries for issue of bonds Jan 1 Cash A/c Dr. 102,000 To 6% Bond Payable 100,000 To Premium on issue of bonds 2,000 Jul 1 Cash a/c Dr. 442,500 Discount on issue of bonds 57,500 To 10% Bond Payable 500,000 Jul 1 Cash A/c Dr. 10,853 To 8% Bond Payable 10,000 To Premium on issue of bonds 853 Journal Entry for payment of interest on July 1 Jul 1 Interest on Bonds Payable Dr 280 Premium on issue of Bonds A/c Dr. 20 To Cash A/c 300 Journal Entry for Interest Accrual Dec 31 Interest on Bonds Payable A/c Dr. 280 Premium on issue of bonds A/c Dr. 20 To Accrued Interest on Bonds Payable 300 Dec 31 Interest on Bonds Payable A/c Dr. 27,875 To Accrued Interest on Bonds Payable A/c 25,000 To Discount on issue of bonds 2,875 Dec 31 Interest on Bonds Payable A/c Dr. 357.35 Premium in issue of bonds A/c Dr. 42.65 To Accrued Interest on bonds payable A/c 400

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