In: Accounting
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:
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 |