Question

(Entries for Bond Transactions-straight line) Celine Dion-company issued $600,000 of 10%-20-year bonds on January 1, 2017 at 102. Interest is payable semiannually on July 1 and January 1. Dion company uses the straight-line method of amortization for bond premium or discount.

Instructions: Prepare the journal entries to record the following:

a) The issuance of the bonds

b) The payment of interest and the related amortization on July 1, 2017

c) The accrual of interest and the related amortization on December 31, 2017.

Answer 1

Face value of the bonds issued Bonds' issue price Premium on bonds issued Number of semiannuals to maturity Premium amortized per semiannual (Straight-line) $600,000 $612,000 [$600000 x 102%] $12,000 (Difference betweeen $600000 and $612000] 40 [20 years x 2] $300 ($12000 / 40 semiannuals] As the bonds are issued at a price more than bonds' par value, it is considered as "issued at premium". Under straight-line method, such premium shall be amortized over bond's life equally at each coupon period. Bond's face value Semiannual coupon rate Annual coupon payment $600,000 5% [10% / 2 --> Annual coupon rate is converted into semiannual coupon rate] $30,000 ($600000 x 5%]

No. Date Jan. 1 Debit $612,000 Account Titles and Explanation Cash Bonds Payable Premium on Bonds Payable Credit [Issue price of the bonds at 105] $600,000 [Face value of the bonds) $12,000 [As calculated above] Jul. 1 Interest Expense Premium on Bonds Payable Cash $29,700 $300 [Balancing figure --> $30000 - $300 = $29700] [$12000 / 40 semiannuals] $30,000 [$600000 x 5%] Dec. 31 Interest Expense Premium on Bonds Payable Interest Payable $29,700 $300 [Balancing figure --> $30000 - $300 = $29700] ($12000 / 40 semiannuals] $30,000 ($600000 x 5%] NOTE: Entry on Dec. 31 contains 'Interest Payable' account because interest for the second semiannual shall be payable on Jan. 1 of next year only.