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$500,000 of bonds of Tom Turkey Co. were sold on December 1, 20A at $518,375 plus...

$500,000 of bonds of Tom Turkey Co. were sold on December 1, 20A at $518,375 plus accrued interest. The bonds pay 6% interest annually. Interest payments are made on February 28 and August 31. The bonds were dated September 1, 20A and have a 9 year life. Tom Turkey has a fiscal year end of August 31.

*Looking for andswers to questions 6-9

Required:

1.What is the amount of interest that will be paid to the bondholders on a monthly basis?

2.What is the amount of accrued interest the bondholders will be Required to pay when they purchase the bonds on December 1, 20A?

3.What is the amount of discount or premium?

4.Over what period of time should the discount or premium be amortized?

5.What would be the amortization amount per month assuming straight-line amortization?

6.Give the journal entry to record the sale of the bonds on December 1, 20A

7.Give the journal entry to record the semiannual interest payment on February 28, 19B, including the amortization of any premium or discount.

8.Give the journal entry to record the semiannual interest payment on August 31, 19B, including the amortization of any premium or discount.

9.   Show how the bonds would be reported on the classified balance sheet at the fiscal year end August 31, 19B.

Solutions

Expert Solution

1.What is the amount of interest that will be paid to the bondholders on a monthly basis?
Annual interest = 6% x 500000 = 30000, monthly interest = 30000/12 = 2500 per month
2.What is the amount of accrued interest the bondholders will be Required to pay when they purchase the bonds on December 1, 20A?
Bond accrued interest is for 3 months so , total accrued interest on Dec 1 is : 2500 x 3 months = 7500
3.What is the amount of discount or premium?
Amount of premium is : 518375-500000 = 18375
4.Over what period of time should the discount or premium be amortized?
Total period is 9 years i.e. 108 months and 3 mnths already passed so remaining amortization period is 105 months
5.What would be the amortization amount per month assuming straight-line amortization?
Amortization amount per month is : 18375/105 = 175 per month
6.Give the journal entry to record the sale of the bonds on December 1, 20A
Date Account titles Debit Credit
Dec 1, 20A Cash $        525,875
Bonds Payable $        500,000
Interest Expense $            7,500
Premium on bonds payable $          18,375
7.Give the journal entry to record the semiannual interest payment on February 28, 19B, including the amortization of any premium or discount.
Date Account titles Debit Credit
Dec 1, 20A Interest Expense $          14,475
Premium on bonds payable $                525 (175 x 3 Months)
Cash $          15,000
8.Give the journal entry to record the semiannual interest payment on August 31, 19B, including the amortization of any premium or discount.
Date Account titles Debit Credit
Dec 1, 20A Interest Expense $          13,950
Premium on bonds payable $            1,050 (175 x 6 Months)
Cash $          15,000
9.   Show how the bonds would be reported on the classified balance sheet at the fiscal year end August 31, 19B.
Partial balance sheet
Long term liabilities
Bonds Payable 500000
Add: Premium on bonds payable 16800 $        516,800

ekkarill92 answered 1 year ago
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