Question

Island Cove Corporation had the following bond issue: Date of issue/sale: May 1, 20-A Principal: $500,000 Sale price of bonds: 104 Life of bonds: 10 years Stated rate: 6% a year payable semiannually on October 31 and April 30 Required: Prepare the following general journal entries. a. The issuance of the bonds on May 1, 20-A. The first interest payment Redeem the bonds at maturity

Answer 1

WORKING NOTES : 1
CALCULATION OF PREMIUM OF BONDS AMORTIZATION PER PERIOD
Par Value of the bonds =		$5,00,000
Issue price of the bond ($500,000 X 104%)		$5,20,000
Premium on issue of Bonds		$20,000
Coupon amount @ 6% of $ 500,000		$30,000
Coupon amount per six monthly = $ 30,000 / 2		$15,000
Life of the Bonds =		10 Years
Total Period = 10 x 2 =		20 Periods
Premium Amortized over 20 Periods ($ 20,000 / 20 Periods)		$1,000	Per Periods
WORKING NOTES : 2
	CALCULATION OF INTEREST EXPENES PER PERIOD
	Coupon Amount Per Period	$15,000
	Less : Amortization value	$1,000
	Interest Expenses per year	$14,000
SOLUTION : A
Journal Entries
Date	Account Title and explanation	Debit	Credit
May 01, 20A	Cash	$                       5,20,000
	Bonds Payable		$             5,00,000
	Premium on issue of Bonds		$                20,000
	( Record the issuance of the bonds)
SOLUTION : B
Journal Entries
Date	Account Title and explanation	Debit	Credit
October , 30	Interest Expenses	$                           14,000
	Premium on Issue on Bonds	$                             1,000
	Cash		$                15,000
	(Record the interest expenses )
SOLUTION : C
Journal Entries
Date	Account Title and explanation	Debit	Credit
--------	Bonds Payable	$                       5,00,000
	Cash		$             5,00,000
	(Record the redumption of bonds)