Question

Stephanie Ram Corporation have a $1,180,000 "bond issue" dated February 1, 2016 due in 10 years with an annual interest rate of 15%. Interest is payable February 1 and August 1. On April 1, 2016, the bond was sold for $1,097,400 plus accrued interest.

Using the straight-line method, prepare the general journal entries for each of the following:

a)		The issuance of the bond on April 1, 2016.
b)		Payment of the semi-annual interest and the amortization of the discount on August 1, 2016.
c)		Accrual of the interest and the amortization of the discount on December 31, 2016.
d)		Payment of the semi-annual interest and the amortization of the discount on February 1, 2017.

Date Account Titles and Explanation Debit Credit 2016 Apr. 1 Cash 1126900 Discount on Bonds Payable 82600 Bonds Payable 1180000 Bond Interest Payable 29500 Aug. Bond Interest Expense 59000 Bond Interest Payable 29500 Discount on Bonds Payable 4130 Cash 84370 X Dec. 31 Bond Interest Expense 73750 Bond Interest Payable 70308 Discount on Bonds Payable 3442 2017 Feb. 1 Bond Interest Expense 14750 Bond Interest Payable 70308 Discount on Bonds Payable 688 Cash 84370

Answer 1

ANSWER

Stephanie Ram Corporation

Entries –

Date	Account Titles and Explanation	Ref. Post	Debit	Credit
1-Apr-16	Cash		$1,126,900
	Discount on Bonds Payable		$82,600
	Bonds Payable			$1,180,000
	Interest Payable			$29,500
	(to record issue of bond with accrued interest for two months, Feb-March; 1,180,000 x 15% x 2/12 = 29,500)
1-Aug-16	Interest Expense		$59,000
	Interest Payable		$29,500
	Discount on Bonds Payable			$4,130
	Cash			$84,370
	(To record payment of semiannual interest and amortization of discount)
31-Dec-16	Interest Expense		$73,750
	Interest Payable			$70,308
	Discount on Bonds Payable			$3,442
	(to record accrued interest and amortization of discount)
1-Feb-17	Interest Expense		$14,750
	Interest Payable		$70,308
	Discount on Bonds Payable			$688
	Cash			$84,370
	(To record payment of semiannual interest and amortization of discount)

1. Discount on bond = $1,180,000 - $1,097,400 = $82,600

Periods = 10 years x 2 = 20

Straight line method of amortization for bond discount = 82,600/20 = $4,130

Semiannual interest = 1,180,000 x 15% x 6/12 = $88,500

Accrued interest on bonds; interest payable = 1,180,000 x 15% x 2/12 = $29,500

1. August 1, 2016

Interest expense = 1,180,000 x 15% x 4/12= $59,000

Amortization of Discount on bonds = $4,130

Interest payable = $29,500

Cash payment = 88,500 – 4,130 = 84,730

1. Dec 31, 2016 –

Amortization of discount = 4,130 x 5/6 = $3,442

(for the 5-month period, Aug to Dec)

Interest expense = 1,180,000 x 15% x 5/12 = 73,750

Interest payable = 73,750 – 3,442 = 70,308

1. Feb 1, 2017 =

Amortization of discount = 4,130 x 1/6 = $688

Interest expense = 1,180,000 x 15% x 1/12 = 14,750

Cash = (14,750 + 70,308) – 688 = 84,370

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