Question

Sunland Company issued $696,000 of 10%, 20-year bonds on January 1, 2020, at 102. Interest is payable semiannually on July 1 and January 1. Sunland Company uses the effective-interest method of amortization for bond premium or discount. Assume an effective yield of 9.7705%.

Prepare the journal entries to record the following. (Round intermediate calculations to 6 decimal places, e.g. 1.251247 and final answer to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

(a)		The issuance of the bonds.
(b)		The payment of interest and related amortization on July 1, 2020.
(c)		The accrual of interest and the related amortization on December 31, 2020.

Answer 1

Answer:

Journal entries
Date	Account name	Dr amount	Cr amount
Jan 1,2020	Cash	709920		(696000*102/100)
	Bonds payable		696000
	Premium on bonds payable		13920	(696000*2/100)
	(being bonds issued)
July 1,2020	Interest expense	34681.37
	Premium on bonds payable	118.63		34800 -(9.7705%/2*(696000+13920)
	Cash		34800	(10%/2*696000)
	(being interest paid)
Dec31,2020	Interest expense	34675.57
	Premium on bonds payable	124.43		34800-(9.7705%/2*(696000+13920-118.63)
	Interest payable		34800	(10%/2*696000)
	(being interest payable)
To calculate the amortization amount,
Step 1	Calculate the interest payable amount (5%*696000)=34800
Step 2	Calculate the effective interest payable amount on book value of bond (9.7705%/2*bookvalue)
	Book value= Bonds payable account balance+ Premium on bonds payable account balance
Step 3	amortization =step1-step 2