euestion Presented below are selected transactions on the books of Simonson Corp
ID: 2423938 • Letter: E
Question
euestion Presented below are selected transactions on the books of Simonson Corporation May 1, 2014 Bonds payable with a par value of $1,018,800, which are dated January 1, 2014, are sold at 107 plus accrued interest. They are coupon bonds, bear interest at 11% (payable annually at January 1), and mature January 1, 2024 . (Use interest expense account for accrued interest.) Adjusting entries are made to record the accrued interest on the bonds, and the amortization of the proper amount of premium. (Use straight-line amortization.) Dec. 31 Jan. 1, 2015 Interest on the bonds is paid April 1 Bonds with par value of $365,900 are called at 102 plus accrued interest, and redeemed. (Bond premium is to be amortized only at the end of each year.) Adjusting entries are made to record the accrued interest on the bonds, and the proper amount of premium amortized Dec. 31 Prepare journal entries for the transactions above. (Round answers 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.)Explanation / Answer
Answer:
When Bonds are issued on the other than the interest payment dates, buyer of the bond will pay the seller the interest accrued from the last interest payment date to the date of issue.This is beacuse the buyers of the bonds are not entitled to the month interest i.e in this case 4 months, that they did not hold the bonds.
1,018,800 * 11/100 * 4/12
= $ 37,356 Interest Expense
Then there is the bond premium that must be takeninto account.
1,018,800 * 5.5/100 = $ 56034
Total Value of Investment
TV = 1,018,800 * ( 107 +4 )
= 1,130,868
Cash .....................................................................................Dr 1,112,190
Bond Payable...................................................................Cr 1,018,800
Premium on Bonds Payable...............................................Cr. 56034
Interest Expense...............................................................Cr.37,356
Dec 31. Interest Expense..........................................................Dr. $ 112,068
Interest Payable.....................................................$ 112,068
( 1,018,800 * 11/100 )
Premium on Bond Payables...........................................Dr. $ 2,019
Interest Expense......................................................$ 2,019
[ 56034 * 4/ (107 + 4) ] = $ 2,019
Jan 1 , Interest Payable...............................................................Dr. $ 112,068
Cash.......................................................................$ 112,068
April 1, Bond Payable..................................................................Dr. $ 365,900
Premium on Bonds Payable..............................................Dr. $ 19,399
Interest Expense..............................................................Dr. $ 10,062
Cash............................................................................ $ 383,200
Gain on Redemption of Bonds........................................ $ 12,161
[ Premium on BP : 56034 * ( 365,900 / 1,018,800 ) * ( 107/111) = $ 19,399 ]
[ 365,900 * 11% * 3/12 ] = $ 10,062
[ 365,900 * 102% + 10,062 ] = $ 383,280
Dec 31. Interest Expense...........................................................Dr. $ 71,819
Interest Payable..............................................................$ 71,819
[ 1,018,800 - 365,900 * 11/100 ] = $ 71,819
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