Question

On January 1, 2017, Novak Company sold 12% bonds having a maturity value of $520,000 for $603,047, which provides the bondholders with a 8% yield. The bonds are dated January 1, 2017, and mature January 1, 2022, with interest payable December 31 of each year. Novak Company allocates interest and unamortized discount or premium on the effective-interest basis.

a)Prepare the journal entry at the date of the bond issuance

b)Prepare a schedule of interest expense and bond amortization for 2017–2019

c)Prepare the journal entry to record the interest payment and the amortization for 2017.

d)Prepare the journal entry to record the interest payment and the amortization for 2019.

Answer 1

(a)-Journal entry at the date of the bond issuance

Account Titles and Explanation	Debit ($)	Credit ($)
Cash A/c	6,03,047
To Premium on Bond Payable A/c		83,047
To Bond Payable A/c		5,20,000
[Journal entry at the date of the bond issuance]

(b)-Schedule of interest expense and bond amortization

Year	Cash Interest Paid	Bond Interest Expense	Amortization of Premium	Unamortized Premium	Carrying Value
Jan 1, 2017	-	-	-	83,047	6,03,047
Dec 31, 2017	62,400	48,244	14,156	68,891	5,88,891
Dec 31, 2018	62,400	47,111	15,289	53,602	5,73,602
Dec 31, 2019	62,400	45,888	16,512	37,090	5,57,090
Dec 31, 2020	62,400	44,567	17,833	19,257	5,39,257
Dec 31, 2021	62,400	43,143	19,257	0	5,20,000
TOTAL	3,12,000	2,28,953	83,047

(c)-Journal entry to record the interest payment and the amortization for 2017 using effective interest method

Account Titles and Explanation	Debit ($)	Credit ($)
Interest Expenses A/c	48,244
Premium on Bond Payable A/c	14,156
To Cash A/c		62,400
[Journal entry to record the interest payment and the amortization for 2017]

(d)-Journal entry to record the interest payment and the amortization for 2019 using effective interest method

Account Titles and Explanation	Debit ($)	Credit ($)
Interest Expenses A/c	45,888
Premium on Bond Payable A/c	16,512
To Cash A/c		62,400
[Journal entry to record the interest payment and the amortization for 2019]