No. | Date | Account titles and explanation | Debit | Credit | |||||
(a) | Aug 1,2021 | Bonds payable | 270000 | ||||||
Discount on bonds payable | (Note:1) | 4708 | |||||||
Common stock | (270000/1000)*8*100 | 216000 | |||||||
Paid in capital in excess of par value | (Plug) | 49292 | |||||||
(To record the issuance of shares of common stock | |||||||||
and the write-off of the discount on bonds payable) | |||||||||
Aug 1,2021 | Interest payable | (270000*12%*1/12) | 2700 | ||||||
Cash | 2700 | ||||||||
(To record payment in cash of interest accrued on | |||||||||
bonds) | |||||||||
(b) | Aug 31,2021 | Interest expense | (Note:2) | 396 | |||||
Discount on bonds payable | 396 | ||||||||
(To record amortization of discount on bonds) | |||||||||
Aug 31,2021 | Interest expense | (2700000*90%*12%*1/12) | 24300 | ||||||
Interest payable | 24300 | ||||||||
(To record accrual of interest on bonds) | |||||||||
c) | Dec 31,2021 | Income summary | (Note:3) | 315560 | |||||
Interest expense | 315560 | ||||||||
(To close expense account) | |||||||||
Note:1 | |||||||||
Face value of bonds issued=$ 2700000 | |||||||||
Face value of bonds converted=$ 270000 | |||||||||
10% bonds converted | |||||||||
Discount on issue of bonds=$ 52800 | |||||||||
Discount amortized on straight-line basis | |||||||||
Life of the bond=10 years=10*12=120 months | |||||||||
Discount to be amortized per month=52800/120=$ 440 | |||||||||
Discount amortized from July 1,2020 to Aug 1,2021 (13 months)=440*13=$ 5720 | |||||||||
Unamortized discount=52800-5720=$ 47080 | |||||||||
Unamortized discount related to bonds converted=47080*10%=$ 4708 | |||||||||
Note:2 | |||||||||
Unamortized discount related to 90% bonds=47080*90%=$ 42372 | |||||||||
Remaining period=120-13=107 months | |||||||||
Discount to be amortized per month=42372/107=$ 396 | |||||||||
Note:3 | |||||||||
Interest expense includes amortization and monthly bond interest | |||||||||
Amortization: | |||||||||
From Jan 1 to Aug 1 (7 months)=7*440=$ 3080 | |||||||||
From Aug 1 to Dec 31 (5 months)=5*396=$ 1980 | |||||||||
Total amortization for the year=3080+1980=$ 5060 | |||||||||
Interest on bonds: | |||||||||
From Jan 1 to Aug 1 (7 months)=2700000*12%*(7/12)=$ 189000 | |||||||||
From Aug 1 to Dec 31 (5 months)=(2700000-270000)*12%*(5/12)=$ 121500 | |||||||||
Total interest for the year=189000+121500=$ 310500 | |||||||||
Interest expense for the year=5060+310500=$ 315560 | |||||||||
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