Final answer:
The student's query about Cheyenne Corporation's bond issuance and corresponding journal entries was addressed by detailing the proper accounting for bond issuance, interest payment, and year-end adjusting entries using the effective-interest method.
Step-by-step explanation:
The student's question is related to accounting for bond transactions using the effective-interest method. On January 1, 2025, Cheyenne Corporation issued $460,000 of 7% bonds for $494,220, an amount above par, since the market rate of 6% was lower than the stated rate of 7%. This indicates a premium on bonds payable. The bonds will pay interest every July 1 and January 1. When preparing journal entries for the issuance, interest payment, and adjusting entries, we must consider the effective interest rate and accrued interest.
Journal Entry for January 1 Issuance
Debit Cash $494,220
Credit Bonds Payable $460,000
Credit Premium on Bonds Payable $34,220
Journal Entry for July 1 Interest Payment
First, calculate the interest expense based on the effective-interest rate: $460,000 x 6% x 6/12 months = $13,800. The cash paid for interest is based on the stated rate: $460,000 x 7% x 6/12 months = $16,100. The difference is the amortization of the premium: $16,100 - $13,800 = $2,300.
Debit Interest Expense $13,800
Debit Premium on Bonds Payable $2,300
Credit Cash $16,100
Journal Entry for December 31 Adjusting Entry
Similar to the July 1 entry, the interest expense is based on the effective interest rate and the same calculation applies. There would be another amortization of the premium and an accrual for the six months of interest (July to December).
Debit Interest Expense $13,800
Debit Premium on Bonds Payable $2,300
Credit Interest Payable $16,100