Grandular Inc., issued $700,000, 12%, 3 year bonds on January 1, 2014. The bonds
ID: 2482988 • Letter: G
Question
Grandular Inc., issued $700,000, 12%, 3 year bonds on January 1, 2014. The bonds are priced to yield 10%. Grandular received $735,533 cash for the bond issuance. Interest of $42,000 is paid semi-annually on June 30 and December 31, each year.
Grandular made the following erroneous entries on June 30 and December 31 to account for the interest payments:
Bonds payable $42,000
Cash $42,000
The error was detected in 2014 before the books had been closed. Further suppose that Grandular accounted for the original bond issuance correctly. Prepare the necessary adjusting entry to correct the error in recording the interest payments.
Explanation / Answer
Adjusting entry to correct the error in recording the interest payments:
Entries Made:
Date
Accounts Title and Explanations
Debt
Credit
June. 30
Bonds payable
$ 42,000.00
Cash
$ 42,000.00
Dec. 31
Bonds payable
$ 42,000.00
Cash
$ 42,000.00
Correct Entries those should have been made:
Date
Accounts Title and Explanations
Debt
Credit
June. 30
Interest Expense (See note below)
$ 36,776.65
Premium on Bonds payable (42000-36776.65)
$ 5,223.35
Cash
$ 42,000.00
(Being interest paid and premium amortized)
Note :
Issue Price of Bonds
$ 735,533.00
Semiannual Yield rate = 10%/2 =
5%
Interest expense for first semiannual = 735533 * 5% =
$ 36,776.65
Dec. 31
Interest Expense (See note below)
$ 36,515.48
Premium on Bonds payable (42000-36515.48)
$ 5,484.52
Cash
$ 42,000.00
(Being interest paid and premium amortized)
Note :
Issue Price of Bonds
$ 735,533.00
Less: Premium amortized
$ (5,223.35)
Book Value
$ 730,309.65
Semiannual Yield rate = 10%/2 =
5%
Interest expense for first semiannual = 730309.65 * 5% =
$ 36,515.48
Adjusting entry:
Date
Accounts Title and Explanations
Debt
Credit
Dec. 31
Interest Expense ( 36776.65 + 36515.48)
$ 73,292.13
Premium on Bonds payable (5223.35+5484.52)
$ 10,707.87
Bonds payable (42000+42000)
$ 84,000.00
(being adjustment made for wrong recording of interest paid)
Adjusting entry to correct the error in recording the interest payments:
Entries Made:
Date
Accounts Title and Explanations
Debt
Credit
June. 30
Bonds payable
$ 42,000.00
Cash
$ 42,000.00
Dec. 31
Bonds payable
$ 42,000.00
Cash
$ 42,000.00
Correct Entries those should have been made:
Date
Accounts Title and Explanations
Debt
Credit
June. 30
Interest Expense (See note below)
$ 36,776.65
Premium on Bonds payable (42000-36776.65)
$ 5,223.35
Cash
$ 42,000.00
(Being interest paid and premium amortized)
Note :
Issue Price of Bonds
$ 735,533.00
Semiannual Yield rate = 10%/2 =
5%
Interest expense for first semiannual = 735533 * 5% =
$ 36,776.65
Dec. 31
Interest Expense (See note below)
$ 36,515.48
Premium on Bonds payable (42000-36515.48)
$ 5,484.52
Cash
$ 42,000.00
(Being interest paid and premium amortized)
Note :
Issue Price of Bonds
$ 735,533.00
Less: Premium amortized
$ (5,223.35)
Book Value
$ 730,309.65
Semiannual Yield rate = 10%/2 =
5%
Interest expense for first semiannual = 730309.65 * 5% =
$ 36,515.48
Adjusting entry:
Date
Accounts Title and Explanations
Debt
Credit
Dec. 31
Interest Expense ( 36776.65 + 36515.48)
$ 73,292.13
Premium on Bonds payable (5223.35+5484.52)
$ 10,707.87
Bonds payable (42000+42000)
$ 84,000.00
(being adjustment made for wrong recording of interest paid)
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