Question

Skysong Company issued $468,000 of 10%, 20-year bonds on January 1, 2020, at 102. Interest is payable semiannually on July 1 and January 1. Skysong Company uses the effective-interest method of amortization for bond premium or discount. Assume an effective yield of 9.7705%.

Prepare the journal entries to record the following.
(a) The issuance of the bonds.
(b) The payment of interest and related amortization on July 1, 2020.
(c) The accrual of interest and the related amortization on December 31, 2020.

Answer 1

a)1/1/20 Cash $477,360

Bonds payable $468,000

Premium on Bonds payable $9,360

b)7/1/20 Interest expense $23,320

Premium on Bonds payable $80

Cash $23,400

c)12/31/20 Interest expense $23,315

Premium on Bonds payable $85

Interest payable $23,400

Step-by-step explanation:

In order to prepare the journal entry to record the issuance of the bonds, we first have to calculate the cash, as follows:

Cash=$468,000×1.02=$477,360

Hence, the journal entry to record the issuance of the bonds would be as follows:

1/1/20 Cash $477,360

Bonds payable $468,000

Premium on Bonds payable $9,360

In order to prepare the journal entry to record the payment of interest and related amortization on July 1, 2020, we would have to calculate the interest expense and cash as follows:

Interest expense=$477,360×9.7705%/2=$23,320

Cash=$468,000*10%/2=$23,400

7/1/20 Interest expense $23,320

Premium on Bonds payable $80

Cash $23,400

In order to prepare the journal entry to record the accrual of interest and the related amortization on December 31, 2020. , we would have to calculate the interest expense and interest payable as follows:

Interest expense=($477,360-102)×9.7705%/2 =$23,315

Interest payable=$468,000*10%/2=$23,400

12/31/20 Interest expense $23,315

Premium on Bonds payable $85

Interest payable $23,400