Question

Problem 14-6

Presented below are selected transactions on the books of Splish Corporation.

May 1, 2017		Bonds payable with a par value of $856,800, which are dated January 1, 2017, are sold at 105 plus accrued interest. They are coupon bonds, bear interest at 12% (payable annually at January 1), and mature January 1, 2027. (Use interest expense account for accrued interest.)
Dec. 31		Adjusting entries are made to record the accrued interest on the bonds, and the amortization of the proper amount of premium. (Use straight-line amortization.)
Jan. 1, 2018		Interest on the bonds is paid.
April 1		Bonds with par value of $342,720 are called at 102 plus accrued interest, and redeemed. (Bond premium is to be amortized only at the end of each year.)
Dec. 31		Adjusting entries are made to record the accrued interest on the bonds, and the proper amount of premium amortized.

Prepare journal entries for the transactions above. (Round intermediate calculations to 6 decimal places, e.g. 1.251247 and final answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Answer 1

May 1, 2017
Cash
($856,800 X 105%) + ($856,800 X 12% X 4/12)...	933,912.00
Bonds Payable..................................................			856,800.00
Premium on Bonds Payable...........................			42,840.00
Interest Expense ($856,800 X 12% X 4/12)..			34,272.00
December 31, 2017
Interest Expense ($856,800 X 12%)........................	102,816.00
Interest Payable................................................			102,816.00
Premium on Bonds Payable....................................	2,954.48
Interest Expense
($42,840 X 8/116* = $2,954.48).....................			2,954.48
*(12 X 10) – 4 = 116
January 1, 2018
Interest Payable..........................................................	102,816.00
Cash....................................................................			102,816.00
April 1, 2018
Bonds Payable............................................................	342,720.00
Premium on Bonds Payable....................................	15,511.03*
Interest Expense ($342,720 X .12 X 3/12)..............	10,281.60
Cash ($349,574.40 + $10,281.60)...................			359,856.00
Gain on Redemption of Bonds......................			8,656.63**
*[($342,720 ÷ $856,800) X $42,840 X 105/116 = $15,511.03]
**[($342,720 + $15,511.03) – ($342,720 X 102%)]

Reacquisition price (including accrued interest)
($342,720 X 102%) + ($342,720 X 12% X 3/12)		$359,856.00
Net carrying value of bonds redeemed:
Par value...................................................................	$342,720.00
Unamortized premium
[$42,840 X ($342,720 ÷ $856,800) X 105/116]..	15,511.03	(358,211.03)
Accrued interest ($342,720 X 12% X 3/12).........		(10,281.60)
Gain on redemption of bonds..............................		$ (12,351.72)

December 31, 2018
Interest Expense ($514,080 X .12)...........................	61,689.60
Interest Payable................................................		61,689.60
Premium on Bonds Payable....................................	2,215.86
Interest Expense...............................................		2,215.86
Amortization per year on $514,080
($42,840 X 12/116 X .60*)........................................		$2,659.03
Amortization on $342,720 for 3 months
($42,840 X 3/116 X .40**).........................................		443.17
Total premium amortization.....................................		$2,215.86
*($856,800 – $342,720) ÷ $856,800 = .6
**$342,720 ÷ $856,800 = .4