Question

On January 1, 2022, Blue Company issued $3,400,000 face value, 7%, 10-year bonds at $3,650,227. This price resulted in a 6% effective-interest rate on the bonds. Blue uses the effective-interest method to amortize bond premium or discount. The bonds pay annual interest on each January 1. (a) Prepare the journal entries to record the following transactions. (Round answers to 0 decimal places, e.g. 125. Credit account titles are automatically indented when amount is entered. Do not indent manually.) 1. The issuance of the bonds on January 1, 2022. 2. Accrual of interest and amortization of the premium on December 31, 2022. 3. The payment of interest on January 1, 2023. 4. Accrual of interest and amortization of the premium on December 31, 2023.

Answer 1

Answer and Explanation:

The journal entries are shown below:

On 2022

For Jan 1

Cash Dr $3,650,227

To Premium on bond payable $250,277

To bond payable $3,400,000

(Being bond payable is issued for cash)

For Dec 31

Interest expense ($3,650,227 × 6%) $219,014

Premium on bond payable $18,986

To Interest payable ($3,400,000 ×7%) $238,000

(Being interest expense is recorded)

On 2023

For Jan 1

Interest payable $238,000

To Cash $238,000

(Being cash paid)

Interest expense ($3,650,227 - $18,986) × 6%) $217,874

Premium on bond payable $20,126

To Interest payable ($3,400,000 ×7%) $238,000

(Being interest expense is recorded)