Question

On September 30, Jose’s Jalapenos Inc., issued $1,000,000 of 10-year 9% bonds sated September 30, for $1,067,950 an effective (market) rate of 8%. Interest is payable semi-annually on October 1 and April 1. The bonds were purchased by Juan’s Junk and Basura Inc. Present the entries to record the following transactions for the current year on BOTH sets of books: (Issuing Corporation and Investor) a) Issuance of bonds b) Accrual of interest and amortization for the period ended December 31. Use the effective interest method for the amortization not the straight-line method. c) Redemption of the bonds on January 1 at 102.

Answer 1

(a)	Date	General Journal	Debit	Credit
	Sep 30	Cash	1,067,950
		Bonds payable		1,000,000
		Premium on bonds payable		67,950
(b)
	Payment Date	Cash Payment	Interest Exp.	Amortization of bond premium	Carrying Value
	Sep 30, year				1,067,950
	April 1, year 1	45,000	42,718	2,282	1,065,668
	Oct 1, year 1	45,000	42,627	2,373	1,063,295
	Dec 31	Interest Expense	21,359		(1,067,950 x 8% x 1/2 x 3/6)
		Premium on bonds payable	1,141
		Interest Payable		22,500	(1,000,000 x 9% x 1/2 x 3/6)
(c)	Jan 1	Bonds Payable	1,000,000
		Premium on bonds payable	66,809		(67,950 - 1,141)
		Cash		1,020,000	(1,000,000 x 102/100)
		Gain on redemption		46,809