Question

Richter Corporation sold $1,000,000 face value of bonds at 104 on January 1, 2014. These bonds have a 7% stated rate and mature in 4 years. Interest is payable on June 30 and December 31 of each year.

1. Prepare the journal entry at issuance on January 1, 2014.

2. Prepare the journal entry to record the first interest payment on June 30, 2014.

3. Calculate the carrying value of the bond on Dec. 31, 2014, after the first two interest payments.

4. Prepare the journal entry at maturity, assuming all interest has been recorded.

5. What is the total cost of borrowing (total interest expense)?

Answer 1

Solution:

Requirement:A

Date	Account Titles and Explanation	Debit	Credit
1/1/2014	Cash	$   1,040,000
	Premium on Bonds Payable		$         40,000
	Bonds Payable		$   1,000,000
	(To record bond issued at premium )

Requirement:B

Date	Account Titles and Explanation	Debit	Credit
30/6/2014	Interest Expense	$         30,000
	Premium on Bonds Payable	$            5,000
	Cash		$         35,000
	( To record interest expense Paid)

Requirement:C

Carrying value of the bond on Dec. 31, 2014, after the first two interest payments = $ 1,030,000

Requirement:D

Date	Account Titles and Explanation	Debit	Credit
31/12/2017	Bonds Payable	$   1,000,000
	Cash		$   1,000,000
	(To record bond redemption on maturity )

Requirement:E

Total cost of borrowing (total interest expense) = $ 240,000

Working:

Straight Line Method
Date	Cash Paid	Interest Expense	Premium Amortized	Carrying Amount of Bonds
1/1/2014				$                                1,040,000
30/6/2014	$    35,000	$                  30,000	$                            5,000	$                                1,035,000
31/12/2014	$    35,000	$                  30,000	$                            5,000	$                                1,030,000
30/6/2015	$    35,000	$                  30,000	$                            5,000	$                                1,025,000
31/12/2015	$    35,000	$                  30,000	$                            5,000	$                                1,020,000
30/6/2016	$    35,000	$                  30,000	$                            5,000	$                                1,015,000
31/12/2016	$    35,000	$                  30,000	$                            5,000	$                                1,010,000
30/6/2017	$    35,000	$                  30,000	$                            5,000	$                                1,005,000
31/12/2017	$    35,000	$                  30,000	$                            5,000	$                                1,000,000
		$                240,000

Notes:

1) Straight line amortization method has been used to amortize premium.