Question

Volunteer Inc. issued bonds with a $500,000 face value, 10% interest rate, and a 4-year term on July 1, 2018 and received $540,000. Interest is payable annually. The premium is amortized using the straight-line method. Prepare journal entries for the following transactions.
July 1, 2018: entry to record issuing the bonds
June 30, 2019: entry to record payment of interest to bondholders
June 30, 2019: entry to record amortization of premium
June 30, 2020: entry to record payment of interest to bondholders
June 30, 2020: entry to record amortization of premium

Answer 1

Answer:

Dr Cash    $540,000

Cr Bonds payable                            $500,000

Cr Premium on bonds payable        $40,000

June 30 2019

Dr interest expense($50,000-$10,000) $40,000

Dr Premium on bonds payable               $10,000

Cr cash                                                                       $50,000

June 30 2020

Dr interest expense($50,000-$10,000) $40,000

Dr Premium on bonds payable               $10,000

Cr cash                                                                       $50,000

Explanation:

The premium on the issue of the bonds is the difference between cash proceeds from the issue and the face value of the bonds.

premium=$540,000-$500,000=$40,000

Amortization of the bond premium is $10,000 per year($40,000/4)

The issue of the bond and the attendant receipt of $540,000 cash would enable the cash account to debited with proceeds while the face value of $500,000 and the premium of $40,000 would be credited to bonds payable and premium on bonds payable respectively.

interest on annual basis=$500,000*10%=$50,000