Question

Blossom Company issued $504,000 of 10%, 20-year bonds on January 1, 2020, at 102. Interest is payable semiannually on July 1 and January 1. Blossom Company uses the effective-interest method of amortization for bond premium or discount. Assume an effective yield of 9.7705%.
Prepare the journal entries to record the following. (Round to the nearest dollar.)
(a) The issuance of the bonds.
(b) The payment of interest and related amortization on July 1, 2020.
(c) The accrual of interest and the related amortization on December 31, 2020.

Answer 1

Answer:

The Journal entries are as follows:

(a) On January 1, 2020

Cash A/c [$504,000 × 1.02] Dr. $514,080

       To Bonds payable                               $504,000

       To Premium on Bonds payable          $10,080

(To record the issuance of the bonds)\

(b) On July 1, 2020

Interest expense A/c Dr. $25,114

Premium on Bonds payable A/c Dr. $86

                To cash                                      $25,200

(To record the payment of interest and related amortization)

Workings:

Interest expense:

= $514,080 × (9.7705% ÷ 2)

= $514,080 × 0.0488525

= $25,114

Cash = $504,000 × (10% ÷ 2)

         = $25,200

(c) On December 31, 2020

Interest expense A/c Dr. $25,110

Premium on Bonds payable A/c Dr. $90

                To Interest payable                   $25,200

(To record the accrual of interest and the related amortization)

Workings:

Interest expense:

= ($514,080 - 86) × (9.7705% ÷ 2)

= $513,994 × 0.0488525

= $25,110