Question

On January 1, 2019 Maxxum PLC issued 12% bonds with a face value of £800,000 and offering bondholders a 10% yield. The bonds are dated January 1, 2019 and mature January 1, 2024 with interest payable December 31 each year.  (100 POINTS)

Instructions

1. Prepare the journal entry at the date of the bond issuance.
2. Prepare a schedule of interest expense and bond amortization for 2019-2021
3. Prepare the journal entry to record the interest payment and amortization for 2019
4. Prepare the journal entry to record the interest payment and the amortization for 2021.

Answer 1

a)
Account Title and Explanation	Debit	Credit
Cash##	8,60,651.79
Premium on bond payable		60,651.79
Bond payable		8,00,000.00
## 96000 * PVAF (10%,5) + 800000 * PVIF (10%,5) = 860,651.79
b)
Date	cash payment	Interest expense @ 10%	Premium amortized	Carrying amount
01-01-2019				8,60,651.79
31-12-2019	96000	86,065.18	9,934.82	8,50,716.97
31-12-2020	96000	85,071.70	10,928.30	8,39,788.67
31-12-2021	96000	83,978.87	12,021.13	8,27,767.53
c)
Account Title and Explanation	Debit	Credit
Interest (Expense)	86,065.18
Premium on bonds payable	9,934.82
Cash		96,000.00
d)
Account Title and Explanation	Debit	Credit
Interest (Expense)	83,978.87
Premium on bonds payable	12,021.13
Cash		96,000.00

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