Question

On February 1, 2013, Wolf International issued 10% bonds dated February 1, 2013, with a principal amount of $200,000. The bonds sold for $239,588 and mature in 20 years. The effective interest rate for these bonds was 8%. Interest is paid semiannually on July 31 and January 31. Wolf's financial year is the calendar year. Wolf uses the effective interest method of amortization.financial

Required:

1. Prepare the journal entry to record the bond issuance on February 1, 2013.
2. Prepare the entry to record interest on July 31, 2013.
3. Prepare the necessary journal entry on December 31, 2013.
4. Prepare the necessary journal entry on January 31, 2014.

Answer 1

1. For issuance of Bond on February 1,2013:

Cash A/c Dr. $ 239588

To Bonds Payable A/c $200000

To Premium on Bonds Payable A/c $39588

2. Entry to record interest on July 31, 2013:

Interest Expense A/c Dr. $9584

Premium on Bonds Payable A/c Dr. $416

To Cash A/c $10000

Note:

Interest to paid out in cash is 10% of $200000 for 6 months i.e. $10000.

3. Journal entry on December 31, 2013: (For interest accrual till December 31,2013)

Interest Expense A/c Dr. ($9567*5/6)= 7973

Premium on Bonds Payable A/c Dr. ($433*5/6)= 360

To Cash A/c ( $10000*5/6)= 8333

Note: For closing of books of accounts- interest expense nd premium is amortized for 5 months and remaining will be booked in next month.)

4. Entry to record interest on January 31, 2014:

Interest Expense A/c Dr. ($9567*1/6)= 1594

Premium on Bonds Payable A/c Dr. ($433*1/6)= 73

To Cash A/c ( $10000*1/6)= 1667

Note:

Interest to paid out in cash is 10% of $200000 for 6 months i.e. $10000.

Amortization Table: (percentages are considered semi annually

Date	Interest Payment @ 5% on 200000	Interest Expense @ 4%	Amortization of Bond Premium	Credit balance in bond premium	credit balance in bonds payable	Book value of bonds
Feb 1,2013				39588	200000	239588
July 31,2013	10000	9584	416	39172	200000	239172
Jan 31,2014	10000	9567	433	38739	200000	238739