Question

Brief Exercise 259 Mintz Company issued $400,000, 10%, 10-year bonds on January 1, 2017, at 105. Interest is paid annually on December 31. Mintz uses the straight-line method of amortization and has a calendar year end. Prepare all journal entries made in 2017 related to the bond issue.

Answer 1

Answer:

Dr cash     $420,000

Cr bonds payable                        $400,000

Cr premium on bonds payable $20,000

Dr interest expense($40000-$2,000)       $38,000

Dr premium on bonds payable                  $2,000

Cr cash                                                                            $40,000

Explanation:

The bond price is the pv of all cash inflows promised by the bond which includes annual coupon and repayment of face value at redemption:

bond price=face value *105%

bond price=$400,000*105%=$420000

The cash proceeds from the issue would be debited to cash while bonds payable is credited with $400,000 and premium on bonds payable is credited with $20,000.

amortization of premium=$20,000/10=$2,000

interest payment=10%*$400,000=$40,000