Question

Long-Term Liabilities
Problem 1
Prepare the necessary journal entries to record the following transactions relating to the long-term issuance of bonds of J & J.:
a.On March 1, 2015 J & J issued $800,000 face value J & J. second mortgage, 8% bonds for $872,160, including accrued interest. Interest is payable semiannually on February 1 and August 1 with the bonds maturing 10 years from December 1, 2014. The bonds are callable at 102. The bonds are dated Dec. 1, 2014. Amortization is calculated using straight-line.
b.On Aug. 1st, paid semiannual interest on J & J’s bonds.
c.On Feb.1st paid semiannual interest on J & J Co. bonds and purchased $400,000 face value bonds at the call price in accordance with the provisions of the bond indenture.

Please show all calculations. thanks!!

Answer 1

Solution:-

a:-

Date	Account titles and explanation	Debit	Credit
March 1	Cash	872,160
	Bonds payable		800,000
	Premium on bonds payable		56,160
	Interest expense (800,000 * 8% * 3/12)		16,000

b:-

Date	Account titles and explanation	Debit	Credit
Aug. 1	Interest expense	30,560
	Premium on Bonds Payable ($56,160 × 3/117)	1,440
	Cash		32,000

c:-

Date	Account titles and explanation	Debit	Credit
Feb. 1	Interest expense	29,120
	Premium on Bonds Payable ($56,160 × 6/117)	2,880
	Cash		32,000
	Bonds payable	400,000
	Premium on Bonds Payable*	25,920
	Gain on Redemption of Bonds		17,920
	Cash		408,000

*1/2 × ($56,160 – $1,440 – $2,880) = $25,920