Question

Question 1 On April 1, 2017, Burton Corporation issued $3,000,000 of 8%, 10-year bonds dated April 1, 2017, with interest payments made each October 1 and April 1. The bonds are issued at 103. Burton Corporation amortizes any premium or discount using the straight-line method REQUIRED: a) Is this bond selling at a premium or a discount? How do you tell? b) Prepare the journal entry on April 1, 2017, to issue the bonds c) Prepare the journal entry on October 1, 2017, to record the payment of interest and the amortization of any discount or premium. d) What is the carrying amount of the bond on the balance sheet after the October 1, 2017 entry?

Answer 1

a.the bond is selling at a premium since the issue price (103) is greater than 100.

b.journal entry to issue the bonds.

date	accounts	debit	credit
april 1 2017	cash a/c	3,090,000
	.......To premium on bonds payable		90,000
	........To bonds payable		3,000,000
	(3,000,000*103%=>3,090,000) premium on bonds payable =(3,090,000-3,000,000)=>90,000

c..

october 1 2017	Interest expense	115,500
	premium on bonds payable	4,500
	...........To cash a/c		120,000
	(amortisation of premium on bonds payable = 90,000 / (10 years*2 semiannual payments)=>4,500. cash= 3,000,000*8%*6/12 =>$120,000 interest expense = 120,000-115,500 =>4,500.

d.carrying amount of bonds payable = 3,090,000 - 4,500

=>3,085,500.