Question

please help with this exercise.

Problem 1 Crane Company issued $3,100,000 of 10%, 10-year bonds on January 1, 2017, at 104. Interest is payable semiannually on July 1 and January 1. Crane Company uses the effective interest method of amortization for bond premium or discount. Assume an effective yield of 9.46810%. Prepare the journal entries to record the following. (a) The issuance of the bonds. (b) The payment of interest and related amortization on July 1, 2017. (c) The accrual of interest and the related amortization on December 31, 2017 Date Account Titles and Explanation Debit Credit (a) 1/1/17 (b) 7/1/17 (c) 12/31/17

Answer 1

Answer :-

Journal entries to record the following transaction :-

	Date	Account Titles and Explanation	Debit	Credit
(a)	1/1/17	Cash A/c. Dr.( 3,100 × $104)	$322,400
		To Bond Payable A/c		$310,000
		To Premium on Bond Payable A/c (3,100 × 4)		$12,400
		(To record the insurance of bonds)
		(Note :- We assume that value per bond is $100 then Total bond = $310,000 / $100 = 3,100)
(b)	7/1/17	Interest Expense A/c Dr.	$15,263
		Premium on Bond Payable A/c Dr.	$237
		To Cash A/c (Note - 1)		$15,500
		(To record the payment of interest and related amortization on July 1,2017)
(c)	12/31/17	Interest Expense A/c. Dr.	$15,251
		Premium on Bond Payable A/c. Dr.	$249
		To Interest Payable A/c ( Note -2)		$15,500
		To record the Accural of Interest and the related amortization on December 31,2017)

Note 1 :-

Interest Payable (Cash) = $310,000 × 10% × 1/2

Cash = $15,500

Interest Expense = Carrying value of bond × Effective yield % × 1/2

Interest Expense = $322,400 × 9.46810% × 1/2

Interest Expense = $15,263

Premium on Bond Payable = $15,500 - 15,263 = $237

Note 2:-

Carrying Amount of bonds on January 1,2017 - $322,400

Less - Amortization Premium on Bond Payable- $ 237

Carrying Amount of bonds on July 1,2017 - $322,163

Interest Payable = $310,000 × 10% × 1/2

Interest Payable = $15,500

Interest Expense = Carrying value of bond × Effective yield % × 1/2

Interest Expense = $322,163 × 9.46810% × 1/2

Interest Expense = $15,251

Premium on Bond Payable = $15,500 - $15,251 = $249