Entries for Issuing Bonds and Amortizing Premium by Straight-Line Method McCool

Question

Entries for Issuing Bonds and Amortizing Premium by Straight-Line Method
McCool Corporation wholesales repair products to equipment manufacturers. On April 1, 2012, McCool Corporation issued $30,000,000 of five-year, 10% bonds at a market (effective) interest rate of 8%, receiving cash of $32,446,500. Interest is payable semiannually on April 1 and October 1.

A. Journalize the entry to record the sale of bonds on April 1, 2012. For a compound transaction, if an amount box does not require an entry, leave it blank or enter "0".

B. Journalize the entry to record the first interest payment on October 1, 2012, and amortization of bond premium for six months, using the straight-line method. (Round to the nearest dollar.) For a compound transaction, if an amount box does not require an entry, leave it blank or enter "0".

C. Explain why the company was able to issue the bonds for $32,446,500 rather than for the face amount of $30,000,000.

Explanation / Answer

1, Debit Cash 32,446,500 Credit Bonds Payable 30,000,000 and, credit Premium on Bonds Payable for the difference of 2,446,500 2. Credit Cash for Face Value x Stated Rate = 30,000,000 x 10% /2 = 1,500,000 Debit Bond Premium for total premium of 2,446,500 / 10 years / 2 = 122,32...

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