Question

On 1/1/2011, Shamrock Corporation issued a 10-year $2,950,000 bond with stated interest rate of 8%. Interests were payable annually on 12/31. The bond was issued for $3,157,196 cash. Shamrock used the effective interest method to amortize any bond discount/ premium using.

a. what is the interest rate for the bond?

b. Prepare journal entries on 1/1/2011 and 12/31/2011 for shamrock

c. After paying interests due on 12/31/2015, Shamrock recalled 70% of the bond at 101. Call expenses totaled $5,500. Prepare journal entries for the interest payment and retirement of the bond on 12/31/2015.

d. Assume that everything else is the same except that Shamrock amortizes any bond discount/premium using the straight-line method. redo item (c.) above.

Answer 1

ANSWER;

a) Interest rate            = 8%

b) Journal Entries,

  Debit                                        Credit

   1/1/2011      Cash/Bank A/c     Dr.                                                        31,57,196

                                    Premium on Bonds Payable                                                                                    20,71,96

                                    8% Bonds Payable                                                                                                 29,50,000

                                ( Bond issued at premium)

12/31/2011      Bond Interest Expense A/c            Dr.                                  21,5280.4         

                  ($236,000 cash interest – 20719.6 premium amortization)

                       Premium on Bonds Payable A/c    Dr.                                    20,719.6

                               ($207196 premium / 10 interest payments)

                                                Bank/Cash ($29,50,000 x 8% )                                                                       23,6000

                                    ( To record period interest payment and premium amortization)

12/31/2015    Bond Interest Expense A/c              Dr.                                       21,5280.4

                      Premium on Bonds Payable A/c     Dr.                                          20719.6

                      8% Bonds Payable A/c                  Dr. 2065000

                      Call Expense A/c                            Dr.                                           5500

                                    Bank/Cash A/c                                                                                                        2306500

                                    ($29,50,000 x 8% +2065000+5500 )             

                        (To record period interest payment and premium amortization and

                        redemption of 70% of Bond)