Question

Issued Bond on December 31, 2019

Face Amount $500,000

Stated Maturity Rate 6%

Maturity Date December 31, 2029

Interest Paid Semi-Annually starting on June 30, 2020

The market believes the stated rate is high, pays price of 105 for the bond

We close quarterly starting on 3/31

Prepare necessary journal entries on 12/31/19, 3/31/20 and 6/30/20

On January 1, 2022, we redeemed the bonds at a price of 103

Prepare the necessary journal entry on 1/1/22; closing entries have been made through 12/31/21

Answer 1

We use straight line amortization to solve the problem.

Bonds are issued at a premium ie, 500,000*105/100 = 525,000. So, Premium is $ 25,000.

Jounral Entries ($)

12/31/19	Cash Dr	525,000
	To Bonds Payable		500,000
	To Premium on Bonds Payable		25,000
	(Bonds issued)
3/31/20	Interest Expense Dr (500,000*6%*3/12)	7,500
	Premium on Bonds Payable Dr (25,000/10)*3/12	625
	To Interest Payable		8,125
	(Interest Payable)
6/30/20	Interest Expense Dr	7500
	Interest Payable Dr	8,125
	Premium on Bonds Payable Dr	625
	To Cash		16,250
	(Interest Paid)

1/1/22	Bonds Payable Dr	500,000
	Premium on Bonds Payable Dr (25000/10*8)	20,000
	Profit on Redemption of Bonds Dr (Balancing Figure)		5,000
	To Cash (500,000*103/100)		515,000
	(Bonds redeemed)