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2 April, 08:17

Volunteer Inc. issued bonds with a $500,000 face value, 10% interest rate, and a 4-year term on July 1, 2018 and received $540,000. Interest is payable annually. The premium is amortized using the straight-line method. Prepare journal entries for the following transactions.

July 1, 2018: entry to record issuing the bonds

June 30, 2019: entry to record payment of interest to bondholders

June 30, 2019: entry to record amortization of premium

June 30, 2020: entry to record payment of interest to bondholders

June 30, 2020: entry to record amortization of premium

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  1. 2 April, 08:34
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    Dr Cash $540,000

    Cr Bonds payable $500,000

    Cr Premium on bonds payable $40,000

    June 30 2019

    Dr interest expense ($50,000-$10,000) $40,000

    Dr Premium on bonds payable $10,000

    Cr cash $50,000

    June 30 2020

    Dr interest expense ($50,000-$10,000) $40,000

    Dr Premium on bonds payable $10,000

    Cr cash $50,000

    Explanation:

    The premium on the issue of the bonds is the difference between cash proceeds from the issue and the face value of the bonds.

    premium=$540,000-$500,000=$40,000

    Amortization of the bond premium is $10,000 per year ($40,000/4)

    The issue of the bond and the attendant receipt of $540,000 cash would enable the cash account to debited with proceeds while the face value of $500,000 and the premium of $40,000 would be credited to bonds payable and premium on bonds payable respectively.

    interest on annual basis=$500,000*10%=$50,000
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