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On September 30, Jose’s Jalapenos Inc., issued $1,000,000 of 10-year 9% bonds sated September 30, for...

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. PLEASE ANSWER BOTH SETS OF BOOKS. INCLUDING THE INVESTORS BOOKS

Solutions

Expert Solution

(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

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