Question

On January 1 2017, Aumont Company sold 12% bonds having a maturity value of $500,000 for $537,907.37, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2017 and mature January 1, 2022, with interest payable December 31 of each year. Aumont Company allocates interest and unamortized discount or premium on the effective-interest basis

Instruction (round to the nearest cent)

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

b) Prepare a schedule of interest expense and bond amortization for 2017-2018

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

Solution a:

Journal Entries - Aumont Company
Date	Particulars	Debit	Credit
1-Jan-17	Cash Dr	$537,907.37
	To Bond Payable		$500,000.00
	To Premium on Bond Payable		$37,907.37
	(To record issue of bond at premium)

Solution b:

Bond Amortization Table (Partial)
Semiannual interest period end	Interest to be paid	Interest expense	Premium Amortization	Unamortized Premium	Bond Carrying Value
1-Jan-17				$37,907.37	$537,907.37
31-Dec-17	$60,000.00	$53,790.74	$6,209.26	$31,698.11	$531,698.11
31-Dec-18	$60,000.00	$53,169.81	$6,830.19	$24,867.92	$524,867.92
31-Dec-19	$60,000.00	$52,486.79	$7,513.21	$17,354.71	$517,354.71

solution c:

Journal Entries - Aumont Company
Date	Particulars	Debit	Credit
31-Dec-17	Interest expense Dr	$53,790.74
	Premium on bond payable Dr	$6,209.26
	To Cash		$60,000.00
	(To record annual interest payment and premium amortization)

Solution d:

Journal Entries - Aumont Company
Date	Particulars	Debit	Credit
31-Dec-19	Interest expense Dr	$52,486.79
	Premium on bond payable Dr	$7,513.21
	To Cash		$60,000.00
	(To record annual interest payment and premium amortization)