On December 31 of the current fiscal year, Palus Inc. issued a $500,000 of 10-ye

Question

On December 31 of the current fiscal year, Palus Inc. issued a $500,000 of 10-year 11% bonds. The bonds were dated December 31 of the same year. Interest on the bonds is payable on June 30 and December 31 of each year.

Record the following transactions.

1) The bonds were sold for $531,161 on December 31 of the current year. The market rate of interest on this date was 10%.

2) Interest was paid on June 30, and the related amount of bond premium was amoritized, based on the straight-line method.

3) Interest was paid of December 31, and the related amount of bond premium was amortized based on the straight-line method.

4) On December 31, (bonds are one year old) one half of the bonds were redeemed at 103.

Explanation / Answer

Premium on bond :531161-500000= 31161

Straight line amortisation of permium per semiannaul month = 31161/20= 1558.05    [10*2 semiannaul month]

Interest paid on bond :500000*.11*6/12= 27500

25941.95

**Total premium amortised :1558.05*2= 3116.1

Unamortised premium :31161-3116.1= 28044.9

Date Account Debit credit Dec 31 Cash 531161 Premium on bond payable 31161 Bond payable 500000 June 30 Interest expense [27500-1558.05]

25941.95

Premium on bond payable 1558.05 cash 27500 31 dec Interest expense 25941.95 Premium on bond payable 1558.05 cash 27500 dec 31 Bond payable [500000*1/2] 250000 Premium on bond payable [28044.9*1/2] 14022.45 Loss on redemption of bond [balance figure] 6522.45 cash   [250000*103/100] 257500

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