Rico company issued $400,000, 9%, 20 year bonds on january 1, 2017, at 103. Interest is...

Rico company issued $400,000, 9%, 20 year bonds on january 1, 2017, at 103. Interest is payable annually on January 1. Rico uses straight-line amortization for bond premium or discount.

Instructions

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Prepare the journal entries to record the following.

a) The issuance of the bonds

b) The accrual of interest and the premium amortization on december 31, 2017

c) The payment of interest on january 1, 2018

d) The redemption of the bonds at maturity, assuming interest for the last interest period has been paid and recorded.

Expert Solution

a)
	Date	Account titles and Explanation			Debit	Credit
	January 1, 2017	Cash			$ 4,12,000
		Bonds Payable				$ 4,00,000
		Premium on Bonds Payable				$ 12,000
		(To record issuance of bonds payable)

b)	Date	Account titles and Explanation			Debit	Credit
	December 31, 2017	Interest Expense			$ 24,000
		Premium on bonds payable			$ 12,000
		Interest Payable				$ 36,000
		(To record interest expense)

c)	Date	Account titles and Explanation			Debit	Credit
	January 1, 2018	Interest Payable			$ 36,000
		Cash				$ 36,000
		(To record payment of interest)

d)	Date	Account titles and Explanation			Debit	Credit
	January 1, 2037	Bonds Payable			$ 4,00,000
		Cash				$ 4,00,000
		(To record payment of bonds payable at maturity)
Workings:

Rico company issued $400,000, 9%, 20 year bonds on january 1, 2017, at 103.It means bonds are issued at 103% of Par Value of Bonds.
# 1
Issuance price		=	Par Value x % of Par Value
		=	$ 4,00,000	x	103%
		=	$ 4,12,000
# 2
Issuance price		=	$ 4,12,000
Less Par Value		=	$ 4,00,000

Bonds Premium		=	$ 12,000
# 3
Straight Line amortization of premium				=	Total premium amount /Total life in years
				=	$ 12,000	/	20
				=	$ 600
# 4
Coupon interest paid in cash		=	Par Value x Coupon interest rate
		=	$ 4,00,000	x	9%
		=	$ 36,000

# 5
Coupon interest paid in cash			$ 36,000
Less Premium amortization			$ 12,000

Interest Expenses			$ 24,000

ekkarill92 answered 1 year ago

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