Question

On January 1, 2020, Ivanhoe Company sold 12% bonds having a maturity value of $400,000 for $430,326, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2020, and mature January 1, 2025, with interest payable December 31 of each year. Ivanhoe Company allocates interest and unamortized discount or premium on the effective-interest basis.

(a) Prepare the journal entry at the date of the bond issuance

Answer 1

IVANHOE COMPANY
Journal entries
Date	Account Title and Explanation	Debit	Credit
Jan 1,2020	Cash	$430,326
	12% Bonds payable		$400,000
	Premium on Bonds payable		$30,326
	(to record the issuance of bonds at a premium)
Dec 31,2020	Interest expense	$41,935
	Premium on Bonds payable	$6,065
	Cash		$48,000
	(to record the interest paid to the bond holders and amortization of
	premium on bonds)
	Working notes
	Premium on Bonds payable	$30,326
Maturity period in years	5
Annual amortization of premium on bonds payable	$6,065