Question

Prepare all necessary journal entries for each of the following dates related to The Last Resort, Ltd.'s bond issue.

March 1

Issued $2,000,000 face value, 8% bonds for $2,274,000, including accrued interest. Interest is payable semiannually on December 1 and June 1 with the bonds maturing 10 years from this past December 1 (i.e., December 1 of last year). The bonds are callable at 102.

June 1

Paid semiannual interest on bonds issued on March 1. (Use straight-line amortization of any premium or discount.)

December 1

Paid semiannual interest on bonds and purchased $1,000,000 face value bonds at the call price.

Answer 1

March 1

Cash	$2,274,000
Bonds Payable		$2,000,000
Premium on Bonds Payable		234,000
Interest Expense ($2,000,000×8%×3/12)		40,000

June 1

Interest Expenses	$74,000
Premium on Bonds Payable (234,000 × 3/117)	$6,000
Cash.		$80,000

December 1

Interest Expense	$68,000
Premium on bonds Payable	$12,000
Cash		$80,000

December 1

Bonds Payable	$1,000,000
Premium on bonds Payable	$108,000
Gain on redemption of bonds		$88,000
Cash (10000× $102)		$1,020,000

Premium on bonds payable = ($234,000 - $6,000 - $12,000)× 1/2 = $108,000.