Rico company issued 400000 9 20 year bonds on january 1 2017

Rico company issued $400,000, 9%, 20 year bonds on january 1, 2017, at 103. Interest is payable annually on January 1. Rico uses straight-line amortization for bond premium or discount.

Instructions

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Prepare the journal entries to record the following.

a) The issuance of the bonds

b) The accrual of interest and the premium amortization on december 31, 2017

c) The payment of interest on january 1, 2018

d) The redemption of the bonds at maturity, assuming interest for the last interest period has been paid and recorded.

Solution

a) Date Account titles and Explanation Debit Credit January 1, 2017 Cash $ 4,12,000 Bonds Payable $ 4,00,000 Premium on Bonds Payable $     12,000 (To record issuance of bonds payable) b) Date Account titles and Explanation Debit Credit December 31, 2017 Interest Expense $     24,000 Premium on bonds payable $     12,000 Interest Payable $     36,000 (To record interest expense) c) Date Account titles and Explanation Debit Credit January 1, 2018 Interest Payable $     36,000 Cash $     36,000 (To record payment of interest) d) Date Account titles and Explanation Debit Credit January 1, 2037 Bonds Payable $ 4,00,000 Cash $ 4,00,000 (To record payment of bonds payable at maturity) Workings: Rico company issued $400,000, 9%, 20 year bonds on january 1, 2017, at 103.It means bonds are issued at 103% of Par Value of Bonds. # 1 Issuance price = Par Value x % of Par Value = $       4,00,000 x 103% = $       4,12,000 # 2 Issuance price = $       4,12,000 Less Par Value = $       4,00,000 Bonds Premium = $           12,000 # 3 Straight Line amortization of premium = Total premium amount /Total life in years = $     12,000 / 20 = $           600 # 4 Coupon interest paid in cash = Par Value x Coupon interest rate = $       4,00,000 x 9% = $           36,000 # 5 Coupon interest paid in cash $           36,000 Less Premium amortization $           12,000 Interest Expenses $           24,000