Instructions: Nectarine Company uses the chart of accounts shown below. Create j
ID: 2444427 • Letter: I
Question
Instructions: Nectarine Company uses the chart of accounts shown below. Create journal entries for each situation. Account titles may be used more than once, or not at all, and journal entries may have two, three, or more lines.
Account Titles
1. Cash
2. Accounts Payable
3. Cash Dividends
4. Interest Revenue
5. Interest Payable
6. Bonds Payable
7. Interest Expense
8. Accounts Receivable
9. Common Stock
10. Premium on Bonds Payable
11. Gain on Bond Redemption
12. Loss on Bond Redemption
13. Paid-in Capital in Excess of Par – Common Stock
14. Discount on Bonds Payable
Situation:
Nectarine sold merchandise for $1,500, receiving $300 in cash with the balance on the account.
Debit Credit Amount
1 $300
8 $1200
3 $1500
1a)Nectarine issued $400,000 face amount of 12% bonds payable on January 1, 2017 at 104. The bonds were dated January 1, 2017, pay interest on each January 1, and mature in five years.
1b)Nectarine accrued interest on the bonds described in 1a) above on December 31, 2017. The premium on the bonds is amortized using the straight-line method.
1c)Nectarine issued $200,000 face amount of six-year, 10% bonds payable on January 1, 2017, at 94. Interest is payable annually on January 1. Record the accrual of interest on these bonds at December 31, 2017 using the straight-line method of amortization.
1d)Nectarine redeemed the bonds described in 1a) above at book value when the book value was $409,600.
Explanation / Answer
Part 1a)
The journal entry would involve receipt of cash (including the amount of premium) indicated by a debit to cash account. The amount of par value will be credited to bonds payable account and the difference (premium) will be credited to premium on bonds payable. The journal entry is given below:
__________
Part 1b)
The accrual of interest with straight line method would involve a debit to premium on bonds payable (1/5th of the premium amount), a credit to the interest payable (for the amount of accrued interest) and a debit to interest expense account for the difference between the interest payable and amortized premium. The journal entry is given below:
__________
Part 1c)
The amount of discount on bonds would be amortized by adjusting $2,000 per year. The amount that must have been received at the time of issuance would be $188,000 (200,000*94%). The balance of $12,000 (200,000 - 188,000) is the amount of discount amortized over 6 years. The amount of interest due on bonds would be indicated by a credit entry (200,000*10%) in the interest payable account. The total value of discount on bonds payable and interest payable would be debited to interest expense account. The journal entry is given below:
__________
Part 1d)
The redemption would be indicated by a debit to the bonds payable at par value and a credit to cash account equal to the amount of cash received. The difference between the two will be debited to premium on bonds payable account.
Account Titles Debit Credit Cash (400,000*104%) [1] $416,000 Bonds Payable [6] $400,000 Premium on Bonds Payable (416,000 – 400,000) [10] $16,000