Question

In: Accounting

II. On October 1, 2018, Raven Company issued $400,000 par value bonds dated July 1, 2018....

II. On October 1, 2018, Raven Company issued $400,000 par value bonds dated July 1, 2018. The 10-year bonds have a stated rate of 10%   and pay interest semiannually on January 1 and July 1. The bonds are issued at $454,200 plus accrued interest, and yield 8%. The effective interest method is used.   

Required:

  1. Prepare the journal entry at the date the bond are issued.
  2. Prepare the adjusting entry at December 31, 2018.
  3. Prepare the entry for interest payment on January 1, 2019.
  4. What would be the difference if we assume that that the straight line method was used instead of the effective interest method in amortizing the discount or premium?

Solutions

Expert Solution

Journal Entries
Date Particulars Amount(Dr) Amount(Cr)
01-Oct-18 Cash A/c Dr 490536
To Bonds Payable A/c 454200
To Security premium 36336
(Bonds issued on 8% premium)
01-Oct-18 Interest Expenses A/c   Dr 20000
Premium on bonds payable A/c 1817 21817
To cash A/c
(Interest payable @10% on bond value)
B
31-Dec-18 Bonds Payable A/c   Dr 454200
Security Premium A/c Dr 36336
To cash A/c 490536
(Adjustment entry on 31st December, 2018)
C.
01-Jan-19 Interest Expenses A/c   Dr 46872
To cash A/c 46872
(490536-21817)*10%
(Interest payable entry on 01st january, 2019)
D. If we are Using straight lin method, then following entry will be passes.
Interest Expenses A/c   Dr 49054
Premium on bonds payable A/c 3924
To cash A/c 52978
(Interest by straight line method)
Difference between effective interest method and straight line method
52978-46872 = 6106

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