Question

Problem 1:

On January 1, Altman Company issued bonds that had a par value of $860,000 with a stated interest rate of 5% and a 5 year maturity date. The bonds pay interest semiannually on June 30 and December 31.

The bonds are issued at 103 3/4.

a) Prepare the journal entries Altman Company must record in its books at bond issuance, the first interest payment date, and at bond maturity. Altman Company uses the straight line method to amortize any discount or premium.

Date	Description	Debit	Credit
01/01
	to record the sale of bonds at a premium (103 3/4 of par value)
06/30
	to record the semi-annual interest payment & amortization of premium on bonds
01/01/yr 5
	to record the maturity of bonds

On January 1, Altman Company issued bonds that had a par value of $860,000 with a stated interest rate of 5% and a 5 year maturity date. The bonds pay interest semiannually on June 30 and December 31.

The bonds are issued at 95 1/2.

b) Prepare the journal entries Altman Company must record in its books at bond issuance, the first interest payment date, and at bond maturity. Altman Company uses the straight line method to amortize any discount or premium.

Date	Description	Debit	Credit
01/01
	to record the sale of bonds at a discount (95 1/2 of par value)
06/30
	to record the semi-annual interest payment & amortization of discount on bonds
01/01/yr 5
	to record the maturity of bonds

Answer 1

Solution:

The given both question are individual questions. I am solving here the problem 1.

Problem 1 ---

Issue price of the bonds = Face Value x 103.75% = 860,000*103.75% = $892,250

Face Value of the bonds = $860,000

Issue price is higher than face value, it means bonds are issued at premium.

Premium on Bonds Payable = 892,250 – 860,000 = $32,250

The premium is amortized over the life of bonds using straight line method.

Semi annual amortization of premium = Total Premium / Semi Annual period to maturity

= $32,250 / (2*5)

= $3,225

Journal entries at bond issuance,

Date	General Journal	Debit	Credit
Jan.1	Cash (Issue price)	$892,250
	Bonds Payable (Face Value)		$860,000
	Premium on Bonds Payable (Bal. fig)		$32,250

Journal entry for the first interest payment date

Date	General Journal	Debit	Credit
June.30	Interest Expense	$18,275
	Premium on Bonds Payable (Bal. fig)	$3,225
	Interest Payable or Cash (Face Value $860,000*Coupon Rate 5%*1/2 half yearly)		$21,500

Journal Entry on maturity date

Date	General Journal	Debit	Credit
Dec.31	Bonds Payable	$860,000
	Cash		$860,000

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