Problem 1: On January 1, Altman Company issued bonds that had a par value of $86
ID: 2515728 • Letter: P
Question
Problem 1:
On January 1, Altman Company issued bonds that had a par value of $860,000 with a stated interest rate of 5% and a 5 year maturity date. The bonds pay interest semiannually on June 30 and December 31.
The bonds are issued at 103 3/4.
a) Prepare the journal entries Altman Company must record in its books at bond issuance, the first interest payment date, and at bond maturity. Altman Company uses the straight line method to amortize any discount or premium.
Date
Description
Debit
Credit
01/01
to record the sale of bonds at a premium (103 3/4 of par value)
06/30
to record the semi-annual interest payment & amortization of premium on bonds
01/01/yr 5
to record the maturity of bonds
On January 1, Altman Company issued bonds that had a par value of $860,000 with a stated interest rate of 5% and a 5 year maturity date. The bonds pay interest semiannually on June 30 and December 31.
The bonds are issued at 95 1/2.
b) Prepare the journal entries Altman Company must record in its books at bond issuance, the first interest payment date, and at bond maturity. Altman Company uses the straight line method to amortize any discount or premium.
Date
Description
Debit
Credit
01/01
to record the sale of bonds at a discount (95 1/2 of par value)
06/30
to record the semi-annual interest payment & amortization of discount on bonds
01/01/yr 5
to record the maturity of bonds
Date
Description
Debit
Credit
01/01
to record the sale of bonds at a premium (103 3/4 of par value)
06/30
to record the semi-annual interest payment & amortization of premium on bonds
01/01/yr 5
to record the maturity of bonds
Explanation / Answer
Solution:
The given both question are individual questions. I am solving here the problem 1.
Problem 1 ---
Issue price of the bonds = Face Value x 103.75% = 860,000*103.75% = $892,250
Face Value of the bonds = $860,000
Issue price is higher than face value, it means bonds are issued at premium.
Premium on Bonds Payable = 892,250 – 860,000 = $32,250
The premium is amortized over the life of bonds using straight line method.
Semi annual amortization of premium = Total Premium / Semi Annual period to maturity
= $32,250 / (2*5)
= $3,225
Journal entries at bond issuance,
Date
General Journal
Debit
Credit
Jan.1
Cash (Issue price)
$892,250
Bonds Payable (Face Value)
$860,000
Premium on Bonds Payable (Bal. fig)
$32,250
Journal entry for the first interest payment date
Date
General Journal
Debit
Credit
June.30
Interest Expense
$18,275
Premium on Bonds Payable (Bal. fig)
$3,225
Interest Payable or Cash
(Face Value $860,000*Coupon Rate 5%*1/2 half yearly)
$21,500
Journal Entry on maturity date
Date
General Journal
Debit
Credit
Dec.31
Bonds Payable
$860,000
Cash
$860,000
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Date
General Journal
Debit
Credit
Jan.1
Cash (Issue price)
$892,250
Bonds Payable (Face Value)
$860,000
Premium on Bonds Payable (Bal. fig)
$32,250