Question

On July 1, 2015, Flanagin Corporation issued $1,751,400, 10%, 10-year bonds at $1,989,427. This price resulted in an effective-interest rate of 8% on the bonds. Flanagin uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest July 1 and January 1.

Prepare the journal entry to record the issuance of the bonds on July 1, 2015.

Prepare an amortization table through December 31, 2016 (3 interest periods), for this bond issue.

Prepare the journal entry to record the accrual of interest and the amortization of the premium on December 31, 2015.

Prepare the journal entry to record the payment of interest and the amortization of the premium on July 1, 2016, assuming no accrual of interest on June 30.

Prepare the journal entry to record the accrual of interest and the amortization of the premium on December 31, 2016.

Answer 1

Solution 1:

Journal Entries - Flanagain Corporation
Date	Particulars	Debit	Credit
1-Jul-15	Cash Dr	$1,989,427.00
	To Bond Payable		$1,751,400.00
	To Premium on Bond Payable		$238,027.00
	(To record issue of bond at premium)

Solution 2:

Bond Amortization Schedule - Effective interest method
Date	Interest Payable	Interest Expense	Premium Amortized	Unamortized Premium	Carrying Value
1-Jul-15				$238,027	$1,989,427
31-Dec-15	$87,570	$79,577	$7,993	$230,034	$1,981,434
30-Jun-16	$87,570	$79,257	$8,313	$221,721	$1,973,121
31-Dec-16	$87,570	$78,925	$8,645	$213,076	$1,964,476

Solution 3:

Journal Entries - Flanagain Corporation
Date	Particulars	Debit	Credit
31-Dec-15	Interest Expense Dr	$79,577.00
	Premium on bond payable Dr	$7,993.00
	To Interest Payable		$87,570.00
	(To record interest accrued and premium amortization)

Solution 4:

Journal Entries - Flanagain Corporation
Date	Particulars	Debit	Credit
1-Jul-16	Interest Expense Dr	$79,257.00
	Premium on bond payable Dr	$8,313.00
	To Cash		$87,570.00
	(To record interest payment and premium amortization)

Solution 5:

Journal Entries - Flanagain Corporation
Date	Particulars	Debit	Credit
31-Dec-16	Interest Expense Dr	$78,925.00
	Premium on bond payable Dr	$8,645.00
	To Interest Payable		$87,570.00
	(To record interest accrued and premium amortization)