Question

Swifty Company issued $456,000 of 10%, 20-year bonds on January 1, 2020, at 101. Interest is payable semiannually on July 1 and January 1. Swifty Company uses the straight-line method of amortization for bond premium or discount. Prepare the journal entries to record the following. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) (a) The issuance of the bonds. (b) The payment of interest and the related amortization on July 1, 2020. (c) The accrual of interest and the related amortization on December 31, 2020.

Answer 1

Answer:

Swifty Company

a) Issuance of the bonds:

Debit Cash Account $460,560

Credit Bonds Payable $456,000

Credit Bonds Premium Amortization $4,560

To record the bonds issue and related premium.

b) Payment of interest and related amortization on July 1, 2020:

Debit Interest on Bonds $22,686

Debit Bonds Premium Amortization $114

Credit Cash Account $22,800

c) Accrual of interest and the related amortization on December 31, 2020:

Debit Interest on Bonds $22,686

Debit Bonds Premium Amortization $114

Credit Cash Account $22,800

Explanation:

The total cash received from the bonds issuance is $456,000 x 101% = $460,560.  This amount includes the bonds premium amounting to $4,560, which is the difference between the amount received and the actual value of the bonds.  This amount will be amortized on a straight-line basis over 20 years, semi-annually at $114.