Question

Presented below are selected transactions on the books of Simonson Corporation. May 1, 2020 Bonds payable with a par value of $900,000, which are dated January 1, 2020, are sold at 106 plus accrued interest. They are coupon bonds, bear interest at 12% (payable annually at January 1), and mature January 1, 2030. (Use interest expense account for accrued interest.) Dec. 31 Adjusting entries are made to record the accrued interest on the bonds, and the amortization of the proper amount of premium. (Use straight-line amortization.) Jan. 1, 2021 Interest on the bonds is paid. April 1 Bonds with par value of $360,000 are called at 102 plus accrued interest, and redeemed. (Bond premium is to be amortized only at the end of each year.) Dec. 31 Adjusting entries are made to record the accrued interest on the bonds, and the proper amount of premium amortized.

Answer 1

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)