Prepare the necessary journal entries to record the following transactions relat
ID: 2419996 • Letter: P
Question
Prepare the necessary journal entries to record the following transactions relating to the long-term issuance of bonds of Sloan Co.: Issued $600,000 face value Sloan Co. second mortgage. 8% bonds for $654,120, including accrued interest. Interest is payable semiannually on December 1 and June 1 with the bonds maturing 10 years from this past December 1. The bonds are callable at 102. Paid semiannual interest on Sloan Co. bonds. (Use straight-line amortization of any premium or discount.) Paid semiannual interest on Sloan Co. bonds and purchased $300,000 face value bonds at the call price in accordance with the provisions of the bond indenture.Explanation / Answer
March 1: Cash Dr................................ 654,120
Bonds Payable Cr............................... 600,000
Premium on Bonds Payable Cr ......... 42,120
Interest Expense Cr
($600,000 x 8% x 3/12) ................. 12,000
The bonds are dated December 1 and issued on March 1, so three months interest is accrued.
June 1: Interest Expense Dr ....................... 22.920
Premium on Bonds Payable Dr
($42,120 x 3/117) ...................... 1,080
Cash Cr .......................................... 24,000
straight line method used by
The total number of months is 10X120=120.
Since the bonds are issued after 3 months, the life of the bonds is 117 months. The amortization is for 3 months from March 1 to June 1.
Cash to be paid is 600,000 × (8%/2) = 24,000
Dec. 1: Interest Expense Dr ........................... 21,840
Premium on Bonds Payable
($42,120 × (6 ÷117) Dr................... 2,160
Cash Cr ................................................. 24,000
The above is the entry for interest payment.
For bond redemption we have 300,000
Bonds Payable Dr... 300,000
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