Question
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Please answer the following question Travel In Style Limited issued $1,000,000 of 9% bonds on September...
Please answer the following question
Travel In Style Limited issued $1,000,000 of 9% bonds on September 1, 2017 for $1,058,671. The term of the bonds is September 1, 2017 to September 1, 2025, with interest payable quarterly each December 1, March 1, June 1, and September 1. The company uses the effective interest method with an effective rate of 8%.
1) Prepare the company’s journal entry for the September 1 issuance.
2) Prepare the company’s journal entry for the December 1 interest payment.
Solutions
Expert Solution
Requirement 1
| Date | Account Title and Explanation | Debit | Credit |
| September 1 | Cash | $ 1,058,671 | |
| Premium bonds payable | $ 58,671 | ||
| Bonds payable | $ 1,000,000 | ||
| (To record Issuance of bonds ) |
Requirement 2
Interest payment
| Date | Account Title and Explanation | Debit | Credit |
| December 1 | Bond interest expense | $ 20,667 | |
| Premium bonds payable | $ 1,833 | ||
| Cash | $ 22,500 | ||
| (Interest on bond paid and Discount amortized) |
Working
| Bond issue price | $ 1,058,671 |
| Face value | $ 1,000,000 |
| Premium bonds payable | $ 58,671 |
| Number of Interest payments (8 years x 7) | 32 |
| Discount/ premium to be amortized per payment | $ 1,833 |
| Cash Interest on bond (1000000 x 2.25%) | $ 22,500 |
| Interest expense to be recorded (22500-1833) | $ 20,667 |
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