Question

If you can give me explanations that would be helpful, thanks.

The following is taken from the Sandhill Company balance sheet. Sandhill Company Balance Sheet (partial) December 31, 2020 Current Liabilities Interest payable (for 12 months from January 1 to December 31) Long-term Liabilities Bonds payable, 9% due January 1, 2028 Add: Premium on bonds payable $271,800 $3,020,000 212,000 $3,232,000 Interest is payable annually on January 1. The bonds are callable on any annual interest date. Sandhill uses straight-line amortization for any bond premium or discount. From December 31, 2020, the bonds will be outstanding for an additional 10 years (120 months).

Answer 1

Solution

Sandhill Company

1. Entry to record payment of bond interest:

Date	Account Titles and Explanation	Debit	Credit
Jan 1, 2021	Interest Payable	$271,800
	Cash		$271,800
	(To record payment of interest on Jan 1, 2021)

The interest on bonds is paid on January 1 annually. So, the interest payable at December 31, 2020 is paid on January 1, 2021. The above entry records the interest payment.

2. Entry to amortize bond premium and accrue the interest due:

Date	Account Titles and Explanation	Debit	Credit
Dec 31, 2021	Interest Expense	$250,600
	Premium on bonds payable	$21,200
	Interest Payable		$271,800
	(To record premium on bonds payable and the accrued interest)

Computations:

Amortization of premium –

Premium on bonds payable = $212,000

Using straight line amortization,

Bonds will be outstanding for 10 years

Annual premium amortization = 212,000/10 = $21,200

Interest expense = interest payable – premium amortization

Interest payable = 9% x 3,020,000 = $271,800

Interest expense = 271,800 – 21,200 = $250,600

3. Entry to record redemption of the bond:

Date	Account Titles and Explanation	Debit	Credit
Jan 1, 2022	Bonds Payable	$1,208,000
	Premium on bonds payable	$76,320
	Gain on bond redemption		$28,000
	Cash		$1,256,320
	(To record redemption of bonds called at $104)

Computations:

Premium on bonds redeemed –

Premium on bonds payable balance, Jan 1, 2022 = 212,000 – 21,200 = $190,800

Premium on bonds redeemed = 1,208,000 x (190,800/3,020,000) = $76,320

Cash received on bonds redeemed = 1,208,000 x 104% = $1,256,320

Gain on redemption = (1,208,000 + 76,320) – 1,256,320 = $28,000

4. Adjusting entry at December 31, 2022 to amortize bond premium and to accrue bond interest:

Date	Account Titles and Explanation	Debit	Credit
Dec 31, 2022	Interest Expense	$150,360
	Premium on bonds payable	$12,720
	Interest Payable		$163,080
	(To record interest payable and premium amortization)

Interest payable = 9% x (3,020,000 – 1,208,000) = $163,080

Premium amortization = (212,000 – 21,200 – 76,320) x 1/9 years = 114,480/9 = $12,720

Interest expense = 163,080 – 12,720 = $150,360

Note: interest at 9% is payable on the balance in the bonds payable account.

Balance in bonds payable = 3,020,000 – 1,208,000 = 1,812,000

Premium on bonds payable balance = 212,000 – first year amortization, 21,200 – amortization on bonds redeemed, 76,320 = $114,480

Remaining years to bond maturity = 10 -1 = 9 years

Hence, premium of $114,480 is amortized over 9 years.