Question

(Entries for Bond Transactions) On January 1, 2020, 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, 2020, and mature January 1, 2025, with interest payable December 31 of each year. Aumont Company allocates interest and unamortized discount or premium on the effective-interest basis.

a) Prepare the journal entry for the issuance of the bonds using the information presented (i.e, Bonds issued at $537,907)   

b)  Prepare the journal entry for the issuance of the bonds assuming the bonds were issued at 97

c.   Prepare the journal entry to record the interest payment and the amortization for 2020.

d.   Prepare the journal entry to record the interest payment and the amortization for 2022.

Answer 1

Given information :

Issue Price of 12% bonds is = $ 537,907.37

Maturity Value of 12% bonds = $ 500,000

Bonds Issue Date is January 1,2020 and maturity date is January 1,2025 , Hence the Maturity period is 5 Years

As per the above information it shows that company issued bonds at a Premium of $37,907.37

a) Journal entry for issuance of bonds :

Bank a/c Dr $537,907

To Bonds payable a/c $500,000

To Premium on bonds payable $37,907

b) Assuming the bond face value is $100, given bonds are issued at $97 which is issued at discount

Journal entry for issuing bonds at discount is as follows

5000 bonds issued at $97 at a discount of $3 is

Bank a/c Dr $485,000

Discount on bonds payable a/c Dr   $15000

To Bonds Payable $500,000

c) Interest Payable for the year 2020 is = $500,000*12%

= $60000

Total premium on issue = $37,907

Premium should be amortized over the life of bonds i.e 5 Years

.:. Premium amortized per year = $37,907/5

= $7581.4

Journal entry to record the interest payment and the amortization is

Interest expense a/c Dr $52,418.6

Amortization of Premium a/c Dr $7581.4

To Interest payable/ Bank a/c $60,000

d) As Aumont Company allocates interest and unamortized discount or premium on the effective-interest basis, Journal entry for Interest payment and amortization for the year 2022 is same as above answser (c)