Question

Homework problem- Long term Liabilities (Issue and partial Redemption of bonds between interest payment date)

Star Center issued $2,000,000 of 5%, 20-year bonds. These bonds were issued on January 1, 2016 and pay interest annually on each January 1. The bonds yield 3% and was issued at $2,595,107

Required:

(a) Prepare the journal entry to record the issuance of the bonds on January 1, 2016.

   

b) Prepare a bond amortization schedule up to and including January 1, 2020, using the effective-interest method.

c) Assume that on July 1, 2019, Star Center Co. redeems 50% of the bonds at a cost of $1,358,000 plus accrued interest. Prepare the journal entries to record this redemption.

Answer 1

(a) Journal on issue of bond	$	$
Cash			25,95,107
Premium on issue of bond			5,95,107
5% Bond				20,00,000
(b)
Year	Cash Interest	Interest Expenses	Premium amortised	Unamortized Premium Balance
(a)	(b)	(c )	(d=c-b)	(e=op. bal.- d)
1 Jan., 2016	-	-	-	5,95,107
1 Jan., 2017	1,00,000	1,29,755	29,755	5,65,352
1 Jan., 2018	1,00,000	1,23,268	23,268	5,42,084
1 Jan., 2019	1,00,000	1,17,104	17,104	5,24,980
1 Jan., 2020	1,00,000	1,11,249	11,249	5,13,731
So, premium on bond payable balance is $ 1,41,110
Working Notes:
b) Cash Interest (2000000 x 5%) = $ 1,00,000
c) Interest expenses on issued value
1 Jan., 2017	(2595107*5%)			1,29,755
1 Jan., 2018	((2595107-129755)*5%)			1,23,268
1 Jan., 2019	((2595107-129755-123268)*5%)		1,17,104
1 Jan., 2020	((2595107-129755-123268-117104)*5%)	1,11,249
(c) Journal on redemption of 50% Bond on July 1, 2019
			$	$
5% Bond			10,00,000			10,00,000
Accrued Interest		50,000			(2000000*5%)/12*6 = 50,000
Premium on issue of bond		3,08,000			1358000-1000000-50000
Cash				13,58,000