In: Accounting
Presented below are selected transactions on the books of
Tamarisk Corporation.
May 1, 2017 | Bonds payable with a par value of $825,600, which are dated January 1, 2017, are sold at 106 plus accrued interest. They are coupon bonds, bear interest at 11% (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 $330,240 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.)
Date | Account title | Debit | credit |
May 1 2017 | cash | 905408 | |
Interest expense | 30272 | ||
Premium on bond payable | 49536 | ||
Bond payable (Refer working 1) | 825600 | ||
Dec 31 | Interest expense | 90816 | |
Interest payable (825600*11%) | 90816 | ||
Dec 31 | Premium on bond payable (working 2) | 3416 | |
Interest expense | 3416 | ||
Jan 1 2018 |
Interest payable | 90816 | |
cash | 90816 | ||
April 1 2018 | Bond payable | 330240 | |
premium on bond payable | 17935 | ||
Interest expense | 9082 | ||
cash | 345927 | ||
Gain on redemption of bond (working 3) | 11330 | ||
Dec 31 | Interest expense | 54490 | |
Interest payable (495360*11%) | 54490 | ||
Dec 31 | premium on bond payable | 3587 | |
Interest expense [working 4] | 3587 |
Working
1)Issue price of Bond =825600*106/100 = 875136
Premium on bond payable = Issue price -face value
= 875136-825600
= 49536
Being interest accrued for 4 months (1Jan -1May ) at time of issuance = par value *rate *n/12
= 825600*11%*4 /12
= 30272
Working 2)
Number of years to maturity(in months that is from (1May 2017-1Jan 2027) = 116months
monthly amortization of bond premium =Bond premium /months to maturity
= 49536 /116
= $ 427.034483
Being premium amortized for 8 months (1May -31Dec )=427.034483*8 = 3416 rounded
working 3)
Total premium amortization for 3 months (1Jan -1Apr )= 427.034483 *3 = 1281.103449
Premium amortization attributable to bond redeemed = Bond premium *par value of bonds redeemed /total par value of bonds issued
= 1281.103449*330240 /825600
= 512.441380
Total premium received on issuance | 49536 | |
Less:Amortization in 2017 | -3416 | |
carrying value at end of 2017 | 46120 | |
Carrying value of premium attributable to redeemed bonds [46120*330240/825600] | 18448 | |
less:Amortization on redeemed bonds to be made at end of year 2018 for 3months outstanding (1Jan -1Apr ) | -512.441380 | |
Carrying value of premium on bonds ready for redemption | 17935 rounded |
working 4)
Total premium received on issuance | 49536 | |
Less:Amortization in 2017 | -3416 | |
carrying value of premium at end of 2017 | 46120 | |
Carrying value of premium attributable to redeemed bonds [carrying value at 2017* par value of redeemed bonds /total par value of issued bonds] [46120*330240/825600] |
-18448 | |
Premium outstanding for bonds not yet redeemed | 27672 | |
Number of years left to maturity after 2017 [1Jan 2018-1Jan 2027= 9 years or 9*12 =108 months] | 108 | |
Premium amortization per month on bonds not redeemed [27672/108] | 256.222222 per month | |
Total amortization on bonds not redeemed for 2018 | 256.222222*12 = 3074.666667 | |
Now ,
Total amortization on bonds not redeemed for 2018 | 3074.666667 |
Amortization on redeemed bonds to be made at end of year 2018 for 3months outstanding (1Jan -1Apr ) | 512.441380 |
Total amortization for 2018 | 3587 rounded |
Since At time of redemption ,Bond amortization on bond redeemed are not made for 3 months (1Jan -31Mar) as adjustment is to be made at end of year ,so same is recorded at end of year.