On June 30, 2009, Arlington Company issued $1,500,000 of 10-year,8% bonds, dated

Question

On June 30, 2009, Arlington Company issued $1,500,000 of 10-year,8% bonds, dated June 30, for $1,540,000. Present entries torecord the following transactions:


Arlington Company (1) Issuance of bonds. (2) Payment of first semiannual interest on December31, 2009. (3) Amortization by straight-line method of bondpremium on December 31, 2009. Arlington Company (1) Issuance of bonds. (2) Payment of first semiannual interest on December31, 2009. (3) Amortization by straight-line method of bondpremium on December 31, 2009.

Explanation / Answer

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1

30-Jun-09 Cash $1,540,000        BondsPayable $1,500,000        Premium onBonds payable $40,000 (issuance of Bonds at premium)

2

31-Dec-09 Interest Expense $60,000            Cash $60,000 (pay semi-annual Interest $1500000 x 8% x6/12 $60000)

3

31-Dec-09 Interest Expense $58,000 Premium on Bonds Payable $2,000                   Cash $60,000 (Pay semi-annual interest usingstraight-line amortization) Notes:   The Straight-line method spreads the $40000 premiumaccount's balance evenly over the 20 semi-annual interest payments made for thebonds. This method divides the total premium by the number of the interest payments to determinethe reduction in interest expense to be recognized semiannually. In this case, interestexpense will be reduced by $2000 ($40000 / 20), every six months.

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