Question

Grahame, Inc. has a fiscal year-end of September 30th. On March 1, 2015, Grahame authorized $800,000 in bonds payable; the bonds carry a stated interest rate of 6%, interest to be paid semi-annually on February 28, and August 31st with a term of 12 years. On August 1, 2016, Grahame issued hree-quarters of the bonds at a premium of $25,400.

Prepare the journal entries that would be required relating to the bonds over period March 1, 2015 through September 30, 2016.

Answer 1

Grahame, Inc.

Journal Entries:

March 1, 2015:

No journal entry. A memorandum record is made to recognize that $800,000 bonds payable were authorized to be issued, at an interest rate of 6% with a maturity period of 12 years.

August 1, 2016:

Debit Cash $625,400

Credit Bonds Payable $600,000

Credit Bonds Premium $25,400

To record the issue of 3/4 of the $800,000 bonds payable at a premium of $25,400.

September 30, 2016:

Debit Interest Expense $5,647

Credit Interest Payable $5,647

To accrue interest on bonds payable.

Step-by-step explanation:

a) Data and Calculations:

Authorized bonds payable = $800,000

Rate of interest = 6%

Bonds maturity period = 12 years

Interest payable on the bonds on February 28 and August 31st.

Issued bonds payable = $600,000 ($800,000 * 3/4)

Date of issue = August 1, 2016

Interest Expense = $600,000 * 6% * 2/12 = $6,000

Bonds Premium amortization = $25,400/12 * 2/12 = $353

The interest expense will be reduced by $353 to $5,647 ($6,000 - 353)