Question

The board of directors of Arizona Motor Shops, Inc., authorized the issuance of $1,000,000 face value, 10-year, 6 percent bonds dated April 1, 2016, and maturing on April 1, 2026. Interest is payable semiannually on April 1 and October 1.

DATE	TRANSACTIONS FOR 2016
Apr. 1	Issued $300,000 face value bonds at 102.2.
Oct. 1	Paid the semiannual interest on the outstanding bonds and amortized the bond premium. (Make two entries. Use the straight-line method to compute the amortization.)
Dec. 31	Recorded the adjusting entry for accrued interest and amortization of the bond premium for three months. (Make one entry.)
31	Closed the Bond Interest Expense account to the Income Summary account.

DATE	TRANSACTIONS FOR 2017
Jan. 1	Reversed the adjusting entry made on December 31, 2016.

1.	Record the transactions below in general journal form.

Issued $300,000 face value bonds at 102.2.

Record the payment of semiannual bond interest for the bond issued on April 1

Record the amortization of the premium for the bond issued on April 1.

Recorded the adjusting entry for accrued interest and amortization of the bond premium for three months.

Closed the Bond Interest Expense account to the Income Summary account.

Reversed the adjusting entry made on December 31, 2016.

Analyze:

If the reversing entry was not recorded, what entry would be required when the interest expense is paid in April 2017?

Record the entry for interest expenses paid on bonds, if the reversing entry was not recorded.

Answer 1

Solution

Arizona Motor Shops Inc

General Journal

Date	Account Titles and Explanation		Debit	Credit
1-Apr-16	Cash		$306,600
	Premium on Bonds Payable			$6,600
	Bonds Payable			$300,000
	(To record sale of 10 -year, 6% bonds)
1-Oct-16	Interest Expense		$9,000
	Cash			$9,000
	(To record payment of semiannual interest on bonds - $300,000 x 6% x 6/12)
31-Dec-16	Adjusting Entry:
	Interest Expense		$4,005
	Premium on Bonds Payable		$495
	Interest payable			$4,500
	(To record the adjusting entry for interest payable and amortization of bond permium)
	(interest expense for 3 months = $300,000 x 6% x 3/12, amortization of bond premium = $6,600 ÷ 10 years x 9/12)
31-Dec-16	Closing Entry
	Income Summary		$13,005
	Interest Expense			$13,005
	(To close bond interest expense to income summary account)
1-Jan-17	Reversing entry:
	Interest Payable		$4,500
	Interest Expense			$4,500
	(to reverse the accrued interest to interest expense)
1-Apr-17	Interest Expense		$9,000
	Cash			$9,000
	(To record payment of semiannual interest on bonds)