Question

Nicholas Ram Corporation have a $1,400,000 "bond issue" dated March 1, 2016 due in 15 years with an annual interest rate of 6%. Interest is payable March 1 and September 1. On August 1, 2016, the bond was sold for $1,505,000 plus accrued interest. Using the straight-line method, prepare the general journal entries for each of the following: a) The issuance of the bond on August 1, 2016. b) Payment of the semi-annual interest and the amortization of the premium on September 1, 2016. c) Accrual of the interest and the amortization of the premium on December 31, 2016. d) Payment of the semi-annual interest and the amortization of the premium on March 1, 2017.

Answer 1

Journal entries:

	Date	Account title and explanation	Debit	Credit
a	Aug 1,2016	Cash	$1,540,000
		Premium on bonds payable	$105,000
		Bonds payable		$1,400,000
		Interest expense [1,400,000 x 6% x (5/12)]		$35,000
		[To record issuance of bonds]
b	Sept 1,2016	Interest expense	$45,500
		Premium on bonds payable*		$3,500
		Cash [1,400,000 x 6% x (6/12)]		$42,000
		[To record payment of interest]
c	Dec.31,2016	Interest expense	$30,333
		Premium on bonds payable**		$2,333
		Interest payable [1,400,000 x 6% + (4/12)]		$28,000
		[To record accrued interest]
d	Mar 1,2017	Interest expense	$12,833
		Interest payable	$28,000
		Premium on bonds payable***	$1,167
		Cash		$42,000
		[To record payment of interest]

Calculations:

*Amortization of premium (semi-annual)= [$105,000/15 years] x (6/12)

=$7,000 x (6/12)

=$3,500

**Amortization of premium (for 4 months) = [$105,000/15 years] x (4/12)

=$7,000 x (4/12)

=$2,333

***Amortization of premium (for 2 months) = $7,000 x (2/12)

=$1,167