Question

Pine Corporation issued $500,000 in ten-year, 8% bonds on September 1, 2019. Interest is to be paid semi-annually on May 1 and November 1. The bonds were sold to yield 6% effective annual interest. Pine Corporation has a calendar year-end and follows IFRS.

Instructions: Prepare the entries required for these bonds at • December 31, 2019(year end) • March 1, 2020 • September 1, 2020 when the interest was paid and the entire issue was retired early for $575,000 plus interest.

Answer 1

Date	General Ledger Account	Debit	Credit
31-Dec	Interest Expenses A/c---Dr	10,000
	Bond Premium A/c---Dr	3,333
	To Accrued Interest A/c		13,333
1-Mar	Accrued Interest A/c---Dr	13,333
	Interest Expenses A/c---Dr	5,000
	Bond Premium A/c---Dr	1,667	20,000
	To Bank A/c
1-Sep	Interest Expenses A/c---Dr	30,000
	Bond Premium A/c---Dr	10,000
	To Bank A/c		40,000
1-Sep	8% Bond A/c---Dr	500,000
	Bond Premium A/c--Dr	151,667
	To Gain on repayment of Bond		76,667
	To Bank A/c		575,000

Working-

Bond yields effective rate = 6%

Bond face value = 500,000

Bond coupon = 8%

Since EIR is lower than coupon rate, hence Bonds were issued at premium.

At 666,666 price bond with 8% coupon yields 6% effectively. hence, Bonds were issued at premium of 166,666 which is to be amortized over 10 years through EIR.