Question

Wookie Company issues 8%, five-year bonds, on January 1 of this year, with a par value of $108,000 and semiannual interest payments.
Semiannual Period-End Unamortized Premium Carrying Value
(0) January 1, issuance $8,271 $116,271
(1) June 30, first payment 7,444 115,444
(2) December 31, second payment 6,617 114,617
Use the above straight-line bond amortization table and prepare journal entries for the following:

a) The issuance of bonds on January 1.

b) The first interest payment on June 30.

c) The second interest payment on December 31.

Answer 1

Answer:

See the journal entries and explanation below.

Explanation:

The journal entries will look as follows

a) The issuance of bonds on January 1.

Date         Accounts title                              Debit ($)         Credit ($)  

Jan. 1        Cash                                              111,671

                   Premium on Bonds Payable                                8,271

                   Bonds Payable (w.1)                                        108,000

          (To record issuance of bonds.)                                                  

b) The first interest payment on June 30.

Date         Accounts title                                 Debit ($)         Credit ($)  

Jun. 30    Interest Expense (w.4)                       3,493  

                 Premium on Bonds Payable (w.2)      827

                 Cash (w.3)                                                                 4,320

               (To record first interest payment)                                              

c) The second interest payment on December 31.

Date         Accounts title                                 Debit ($)         Credit ($)  

Dec. 31    Interest Expense (w.4)                       3,493  

                 Premium on Bonds Payable (w.5)      827

                 Cash (w.6)                                                                 4,320

               (To record second interest payment)                                              

Workings:

w.1: Bond payable = Cash - Premium on Bonds Payable = $111,671 - $8,271

w.2: Premium on Bonds Payable = January 1 Unamortized Premium - June 30 Unamortized Premium = $8,271 - $7,444 = $827

w.3: Cash = $108,000 * 8% * (6 / 12) = $4,320

w.4: Interest expense = w.3 - w.2 = $4,320 - $827 = $3.493

w.5: Premium on Bonds Payable = June 30 1 Unamortized Premium - December 31 Unamortized Premium = $7,444 - $6,617 = $827

w.6: Cash = $108,000 * 8% * (6 / 12) = $4,320

w.7: Interest expense = w.6 - w.5 = $4,320 - $827 = $3,493