Question

On January 1, 2016, Gates Corporation issued $100,000 of 5-year bonds due December 31, 2020, for $103,604.79 minus debt issuance costs of $3,000. The bonds carry a stated rate of interest of 13% payable annually on December 31 and were issued to yield 12%. The company uses the effective interest method of amortization to amortize any discounts or premiums and the straight-line method to amortize the debt issuance costs.

Required:

Prepare the journal entries to record the issuance of the bonds, all the interest payments, premium amortizations, debt issuance cost amortizations, and the repayment of the bonds.

Answer 1

Date	Account Titles and Explanation	Debit	Credt
Jan 1, 2016	Cash	$ 100,604.79
	Deferred Bond Issue Costs	$      3,000.00
	Premium on Bonds Payable		$      3,604.79
	Bonds Payable		$ 100,000.00
Dec 31, 2016	Interest Expense	$    12,432.57
	Premium on Bonds Payable	$          567.43
	Cash		$    13,000.00
Dec 31, 2016	Bond issuance expense	$          600.00
to 2020	Deferred Bond Issue Costs		$          600.00
Dec 31, 2017	Interest Expense	$    12,364.48
	Premium on Bonds Payable	$          635.52
	Cash		$    13,000.00
Dec 31, 2018	Interest Expense	$    12,288.22
	Premium on Bonds Payable	$          711.78
	Cash		$    13,000.00
Dec 31, 2019	Interest Expense	$    12,202.81
	Premium on Bonds Payable	$          797.19
	Cash		$    13,000.00
Dec 31, 2020	Interest Expense	$    12,107.15
	Premium on Bonds Payable	$          892.85
	Cash		$    13,000.00
Dec 31, 2020	Bonds payable	$ 100,000.00
	Cash		$ 100,000.00

Bond Interest Expense and Premium Amortization
Schedule: Effective Interest Method
13% Bonds Sold to Yield 12%
Date	Cash Credita	Interest Expense Debitb	Unamortized Premium Debitc	Book Value of Bondsd
Jan 1, 2016				$ 103,604.79
Dec 31, 2016	$      13,000	12432.57	$      567.43	$ 103,037.36
Dec 31, 2017	$      13,000	12364.48	$      635.52	$ 102,401.85
Dec 31, 2018	$      13,000	12288.22	$      711.78	$ 101,690.07
Dec 31, 2019	$      13,000	12202.81	$      797.19	$ 100,892.88
Dec 31, 2020	$      13,000	12107.15	$      892.85	$ 100,000.02
a.    $100,000 (face value) x 0.13 (stated annual interest rate)
b.    Previous book value x 0.12 (effective interest rate)
c.    $13,000.00 - amount from footnote b.
d.    Previous book value - amount from footnote c.
e.    Difference due to $0.02 rounding error.