Answer:
May 1 2020
Dr Cash 954,000
Cr Bonds Payable 900,000
Cr Premium on Bonds Payable 54,000
Dr Cash 36,000
Cr Interest Expense 36,000
December 31
Dr Interest Expense 104,275.86
Dr Premium on Bonds Payable 3,724.14
Cr Interest Payable 108,000
Jan 1, 2021
Dr Interest Payable 108,000
Cr Cash 108,000
April 1
Dr Bonds payable $360,000
Dr Premium on bonds payable $19,738
Dr Interest Expense $10,800
Cr Cash $367,200
Cr Gain on redemption of bonds $23,338
Dec. 31
Dr Interest Expense $64,800
Cr Interest Payable $64,800
Dec. 31
Dr Premium on bonds payable $3,911
Cr Interest Expense $3,911
Explanation:
Preparation of the journal entries
May 1 2020
Dr Cash 954,000
($900,000 * 106%)
Cr Bonds Payable 900,000
Cr Premium on Bonds Payable 54,000
(954,000-54,000)
(Being To record issuance of bonds)
Dr Cash 36,000
($900,000 * 12% * 4/12)
Cr Interest Expense 36,000
(Being To record accrued interest at the issuance of bonds)
December 31
Dr Interest Expense 104,275.86
(108,000-3,724.14)
Dr Premium on Bonds Payable 3,724.14
($54,000 * 8/116months)
Cr Interest Payable 108,000
($900,000 * 12%)
Note that [(10yrs*12months) – 4months] will give us 116 months which was used to amortize premium
(Being To record accrued interest and amortization of premium at year end)
Jan 1, 2021
Dr Interest Payable 108,000
Cr Cash 108,000
($900,000 * 12%)
(Being To record payment of interest)
April 1
Dr Bonds payable $360,000
Dr Premium on bonds payable $19,738
[54,000*($360,000/$900,000)*(106/116)]
Dr Interest Expense $10,800
($360,000*12%*3/12)
Cr Cash $367,200
($360,000*102%)
Cr Gain on redemption of bonds $23,338
[($360,000+$19,738+$10,800)-$367,200]
(Being to record call of Bond and Redemption)
Dec. 31
Dr Interest Expense $64,800
Cr Interest Payable $64,800
[($900,000-$360,000)*12%]
(Being to record the interest)
Dec. 31
Dr Premium on bonds payable $3,911
Cr Interest Expense $3,911
[($54,000*12/116*0.6)+(54,000*3/116*0.4)]/
=$3,352+$559
=$3,911
(Being to Amortized premium)
