Question

Issued $500,000 of 10-year, 5% bonds at 104 with interest payable semi-annually.

Required:
Record the journal entries for the following transactions:
1. the payment of semi-annual interest on the bonds issued.
2. the amortization of the premium for six months. The amortization is determined using the straight-line method.

Answer 1

To record the payment of semi-annual interest on the bonds issued, debit the interest expense account and credit the cash account. For the amortization of the premium, debit the interest expense account and credit the premium on bonds payable account. Use the straight-line method to calculate the amortization.

Step-by-step explanation:

To record the journal entries for the payment of semi-annual interest on the bonds issued, you would debit the interest expense account for the amount of interest due and credit the cash account for the same amount. For the amortization of the premium for six months, you would debit the interest expense account for the amortized amount and credit the premium on bonds payable account for the same amount. The amortization can be calculated using the straight-line method by dividing the premium by the number of interest periods.

Answer 2

In bond accounting, when bonds are issued at a premium, journal entries are required for both semi-annual interest payments and the amortization of the bond premium. The amount of interest paid is based on the bond's face value and interest rate, and the amortization is spread evenly over the life of the bond using the straight-line method.

Step-by-step explanation:

When bonds are issued at a premium (above their face value), there are two primary transactions that typically need to be recorded over the life of the bond: the payment of interest and the amortization (reduction) of the bond premium.

1. Semi-annual interest payment: Assuming a $500,000 bond issued at a 5% annual rate, the semi-annual interest payment would be (5% / 2) × $500,000 = $12,500. The journal entry would be:
   
   Debit: Interest Expense $12,500
   
   Credit: Cash $12,500
2. Amortization of premium using the straight-line method: The total premium is $500,000 × (104% - 100%) = $20,000. Over 10 years, with semi-annual payments, there will be 20 total payments. Thus, each semi-annual amortization will be $20,000 / 20 = $1,000. The journal entry would be:
   
   Debit: Premium on Bonds Payable $1,000
   
   Credit: Interest Expense $1,000