Question

Ace 112 Project 10

Following are independent situations:

Nicholas Ram Corporation have a $2,400,000 "bond issue" dated March 1, 2016 due in 15 years with an annual interest rate of 10%. Interest is payable March 1 and September 1. On August 1, 2016, the bond was sold for $2,478,750 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 August 1, 2016 

b) Payment of the semi-annual interest and the amortization of the premium on September 1, 2016 

c) Accrual of the interest and the amortization of the premium on December 31, 2016 

d) Payment of the semi-annual interest and the amortization of the premium on March 1, 2017

Answer 1

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Clean price of bonds issued	$            2,478,750
Less: face value of bonds	$            2,400,000
Premium on bonds payable	$                  78,750
Clean price of bonds issued	$            2,478,750
Plus: Accured interest (March 1 to August 1 = 5 months) (2400000*10%*5/12)	$               100,000
Total cash received	$            2,578,750
Premium on bonds payable	$                  78,750
Divided by: Number of months (15*12 = 180) (180-5 months already gone. = 175)	175
Amortization of premium per month	$                        450

Journal entries
Date	Account title	Debit	Credit
2016
Aug 1	Cash	$      2,578,750
	Premium on bonds payable		$              78,750
	Bonds payable		$        2,400,000
	Bonds interest payable		$            100,000
	To record the issue of bonds
Sep 1	Bonds interest expense	$            19,550
	Bonds interest payable	$          100,000
	Premium on bonds payable (450*1 month)	$                  450
	Cash (2400000*10%*6/12)		$            120,000
	To record the interest paid on bonds
Dec 31	Bonds interest expense	$            78,200
	Premium on bonds payable (450*4 months)	$               1,800
	Bonds interest payable (2400000*10%*4/12)		$              80,000
	To record the accrued interest on bonds ( Sep 1 to Dec 31 = 4 months)
2017
Mar 1	Bonds interest expense	$            39,100
	Bonds interest payable	$            80,000
	Premium on bonds payable (450*2 month)	$                  900
	Cash (2400000*10%*6/12)		$            120,000
	To record the interest paid on bonds (Jan 1 to Mar 1 = 2 months for interest expense)