Question

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?

Answer 1

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