Question

Exercise 14-7

On January 1, 2017, Vaughn Corporation issued $620,000 of 9% bonds, due in 8 years. The bonds were issued for $656,123, and pay interest each July 1 and January 1. The effective-interest rate is 8%.

Prepare the company’s journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry. Vaughn uses the effective-interest method.

Answer 1

	Journal Entry
	Date	Transaction	Debit	Credit
	1-Jan-17	Cash	$656,123
		To Premium on Bond		$36,123
		To Bonds Payable		$620,000
	1-Jul-17	Interest Expense	$26,244.92		(656123*4%)
		Premium on Bonds Payable	$1,655.08
		To Cash		$27,900.0	(620000*4.5%)
	31-Dec	Interest Expense	$26,178.72		(656123-1655.08)*4%
		Premium on Bonds Payable	$1,721.28
		To Interest Payable		$27,900.0	(620000*4.5%)