Question

Celine Dion Company issued $600,000 of 10%, 20-year bonds on January 1, 2017, at 102. Interest is payable semiannually on July 1 and January 1. Dion Company uses the straight-line method of amortization for bond premium or discount.

Instructions
Prepare the journal entries to record the following.
A) The issuance of the bonds.
B) The payment of interest and the related amortization on July 1, 2017.
C) The accrual of interest and the related amortization on December 31, 2017.

Answer 1

A) The issuance of the bonds.

January 1, 2017, bonds are issued

Dr Cash 612,000

Cr Bonds payable 600,000

Cr premium on bonds payable 12,000

B) The payment of interest and the related amortization on July 1, 2017.

July 1, 2017, first coupon is paid

Dr Interest expense 29,700

Dr Premium on bonds payable 300

Cr Cash 30,000

C) The accrual of interest and the related amortization on December 31, 2017.

December 31, 2017, accrued interest payable

Dr Interest expense 29,700

Cr interest payable 29,700

Step-by-step explanation:

$600,000 of 10%, 20-year bonds at 102, interest is paid semiannually ($600,000 x 10% x 1/2 = $30,000)

straight line amortization method is used to amortize bond premium

bond premium = $12,000 / 40 coupons = $300 amortized with each coupon payment