Question

(TCO D) On January 1, 2010, Solis Co. issued its 10% bonds in the face amount of $3,000,000, which mature on January 1, 2020. The bonds were issued for $3,405,000 to yield 8%. Solis uses the effective-interest method of amortizing bond premium. Interest is payable semi-annually on July 1st and January 1st each year . At December 31, 2010, Please show the Journal entries to record the above:

1. Journal entry to record the Issue of Bonds on January 1, 2010.

2. Journal Entry to record the payment of Interest on July 1st, 2010 and January 1st, 2011. Be sure to record any adjusting entry for December 31st, 2010.

3. What is the Unamortized Discount or Premium Balance on Bonds Payable as of December 31st, 2011?? (Using the Effective Interest Method)

(Hint: Prepare yourself a Schedule like in the textbook to help you do this problem) (Round each answers to nearest dollar when preparing your schedule.)

Answer 1

Solution 1:

Journal Entries
Date	Particulars	Debit	Credit
1-Jan-10	Cash Dr	$3,405,000.00
	To Bond Payable		$3,000,000.00
	To Premium on bond payable		$405,000.00
	(To record issue of bond at premium)

Solution 2:

Journal Entries - Solis Co.
Date	Particulars	Debit	Credit
1-Jul-10	Interest expense Dr ($3,405,000*4%)	$136,200.00
	Premium on bond payable Dr	$13,800.00
	To Cash ($3,000,000*5%)		$150,000.00
	(To record interest payment and premium amortization)
31-Dec-10	Interest expense Dr [($3,405,000 - $13,800)*4%]	$135,648.00
	Premium on bond payable Dr	$14,352.00
	To Interest Payable ($3,000,000*5%)		$150,000.00
	(To record interest payment and premium amortization)
1-Jan-11	Interest Payable Dr	$150,000.00
	To Cash		$150,000.00
	(To record payment of interest)

Solution 3:

Bond Amortization Schedule
Period	Cash Paid	Interest Expense	Premium amortization	Unamortized Premium	Carrying value
1-Jan-10				$405,000	$3,405,000
30-Jun-10	$150,000	$136,200	$13,800	$391,200	$3,391,200
31-Dec-10	$150,000	$135,648	$14,352	$376,848	$3,376,848
30-Jun-11	$150,000	$135,074	$14,926	$361,922	$3,361,922
31-Dec-11	$150,000	$134,477	$15,523	$346,399	$3,346,399

Unamortized premium balance on bond payable as of December 31, 2011 = $346,399