Question

Joe’s Corporation sold its $272,000, 9.50 percent bonds for $330,653 on January 1, 2020. The bondholders...

Joe’s Corporation sold its $272,000, 9.50 percent bonds for $330,653 on January 1, 2020. The bondholders could make 6.50 percent for a similar investment in the market. The bonds mature on December 31, 2029 and will pay cash interest annually every December 31. Assume Joe’s Corporation uses the effective-interest method to amortize any discount or premium.

  1. Prepare the journal entry to issue the bond
  2. Prepare the journal entry for the first interest payment
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Answer #1

Ans:

Issued 9.5% Bonds with book value $272,000 for $333,653.

Premium on Bonds : $333,653 - $272,000 = $61,653

Journal entry to record above transactions will be :

Date Description Debit Credit
January 1, 2020 Cash 333,653
9.5% Bonds 272,000

Premium on bonds

(To report the issue of bonds at premium)

61,653
31 Dec , 2020 Interest on Bonds (6.5% of 333,653) 21,687.44
Premium on bonds (25,840 - 21,687.44) 4,152.56

Cash (272,000*9.5%)

( To report the payment of first interest and amortisation of premium over the period of bond life based on effective interest method)

25,840

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