Question

On March 31st, 2020, Adtech Inc. issued $200,000, 9%, 10-year bonds. The bonds pay interest semi-annually, on September 30 and March 31. The first interest payment is on September 30, 2020. The bonds are issued at a price of 114 1/4 (i.e., $228,500). The issuance price implies an effective interest rate of 7%. Bond issue costs are $10,000, which are amortized using the straight-line method. Adtech's fiscal year-end is on December 31.

1. Prepare all necessary journal entries in relation to these bonds between March 30, 2020 and April 1st, 2021. Make sure you indent your credit and clearly mark the date for each journal entry.

2. What is the amount of the liability that Adtech has to the bondholders on September 30, 2021, after the interest payment on that date?

Answer 1

Answer :

(1)

In the books of Aditech Inc

Date	General Journal	Debit	Credit
31.03.2020	Cash	$228,500	-
	To Bonds payable	-	$200,000
	To Premium on bonds payable	-	$28,500
	(To Record the issuance of bond)	-	-
31.03.2020	Bond issuance cost	$10,000	-
	To Cash	-	$10,000
	(To Record the issuance of bond)	-	-
30.09.2020	Interest expense	$7,998	-
	Premium on bonds payable	$1,002	-
	To Cash	-	$9,000
	(To Record the payment of interest)	-	-
31.12.2020	Interest expense (7962*3/6)	$3,981	-
	Premium on bonds payable (1038*3/6)	$519	-
	To Interest payable	-	$4,500
	(To Record the accrual of interest)	-	-
31.12.2020	Bond issuance expense (10000/10)*9/12	$750	-
	To Bond issuance cost	-	$750
	(To Record amortization of bond issuance costs)	-	-
31.03.2021	Interest expense (7962*3/6)	$3,981	-
	Interest payable	$4,500	-
	Premium on bonds payable (1038*3/6)	$519	-
	To Cash	-	$9,000

(2).

The Amount of liability to the bond holders as on Sep.30.2021 is $225,386

The amount is computed in the amortization schedule

Working Note :

Ammortization Schedule

Period	Cash Payment	Effecrive Interest	Premium Amortization	Outstanding Balance
31.03.20	-	-	-	$228,500
30.09.20	$9,000	$7,998	$1,002	$227,498
-	(200000*4.50%)	(228500*3.50%)	(9000-7998)	(228500 - 1002)
31.03.21	9,000	7,962	$1,038	$226,460
	(200000*4.50%)	(227498*3.50%)	(9000 - 7962)	(227498 - 1038)
30.09.21	9,000	$7,926	$1,074	$225,386
	(200000*4.50%)	(226460*3.50%)	(9000 - 7926)	(226460 - 1074)