On January 1, 2017, Cullumber Corporation issued $500,000 of 7% bonds, due in 10

Question

On January 1, 2017, Cullumber Corporation issued $500,000 of 7% bonds, due in 10 years. The bonds were issued for $537,196, and pay interest each July 1 and January 1. The effective-interest rate is 6%.

Prepare the company’s journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry. Cullumber uses the effective-interest method. (Round intermediate calculations to 6 decimal places, e.g. 1.251247 and final answer 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.)

No.

Date

Account Titles and Explanation

Debit

Credit

January 1, 2017

July 1, 2017

December 31, 2017

No.

Date

Account Titles and Explanation

Debit

Credit

(a)

January 1, 2017

(b)

July 1, 2017

(c)

December 31, 2017

Explanation / Answer

Solution:

Working notes:

Cash payment on interest payment date

=500000*7%*6/12 = $17,500

Interest Expense = 537196*6%*6/12 = $16,116

Amortization of bond premium = 17500- 16116

= $1,384

Note: When the cash payment on Interest date i.e. January 1,2018 is paid we will pass the following entry:-

Interest Payable A/C...... Debit. $17,500

Cash A/C.......................Credit. $17,500

No. Date Particulars Amount($) Debit Amount($) Credit (a) January 1, 2017 Cash A/C 537,196 Bonds Payable A/C 500,000 Premium on Bonds Payable A/C 37,196 (b) July 1, 2017 Interest Expense A/C 16,116 Premium on Bonds Payable 1384 Cash A/C 17,500 (c) December 31, 2017 Interest Expense A/C 16,116 Premium on Bonds Payable A/C 1384 Interest Payable A/C 17,500

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