Question

Exercise 14-5 Culver Company issued $516,000 of 10%, 20-year bonds on January 1, 2017, at 102. Interest is payable semiannually on July 1 and January 1. Culver Company uses the effective-interest method of amortization for bond premium or discount. Assume an effective yield of 9.7705%. Prepare the journal entries to record the following.

a)		The issuance of the bonds.
(b)		The payment of interest and related amortization on July 1, 2017.
(c)		The accrual of interest and the related amortization on December 31, 2017.

Answer 1

a) The issuance of the bonds.

Cash A/c Debit ($516,000 x 1.02).........................$526,320

Bonds Payable A/c Credit....................................$516,000

Premium on Bonds Payable A/c Credit..............$10,320

(To record the bonds issued)

b) The payment of interest and related amortization on July 1, 2017

Interest Expense A/c Debit ($526,320 x 9.7705% x (1/2))........................$25,712

Premium on Bonds Payable A/c Credit....................................................$88

Cash A/c Credit ($516,000 x 10% x (1/2))..................................................$25,800

(To record the interest paid)

c) The accrual of interest and the related amortization on December 31, 2017

Interest Expense A/c Debit (($526,320 - $88) x 9.7705% x (1/2)).............$25,708

Premium on Bonds Payable A/c Credit....................................................$92

Interest Payable A/c Credit ($516,000 x 10% x (1/2))...............................$25,800

(To record the interest paid)