On January 1, 2018, Titanic Corp. acquired 8%, $100,000 (face value) bonds of Ic
ID: 2573983 • Letter: O
Question
On January 1, 2018, Titanic Corp. acquired 8%, $100,000 (face value) bonds of Iceburg Ltd., to yield 6%. The bonds were dated January 1, 2018, and mature on December 31, 2018, with interest payable each January 1. Titanic intends to hold the bonds to maturity, and will use the FV–NI model and the effective-interest method of amortization of bond premium or discount.
Prepare the following entries in Titanic’s books:
1. Acquisition of bonds on January 1, 2018,
2. Year-end adjusting entry at December 31, 2018,
3. Receipt of the first interest payment on January 1, 2019. Round all values to the nearest dollar.
This is all the information that the question provides. I would assume the number of periods is 1 because the interest is payable annually.
Explanation / Answer
Proceeds on Bond issuance = (Annual interest payment x PV6%,1) + (Face value x PV6%,1)
= ($100000 x 8% x 0.9433962) + ($100000 x 0.9433962)
= $101887
Journal
Date Account Name Debit Credit 2018 Jan 1 Cash 101887 Premium on bonds payable 1887 Bonds payable 100000 Dec 31 Interest expense ($101887 x 6%) 6113 Premium on bonds payable 1887 Interest payable ($100000 x 8%) 8000 Dec 31 Interest payable 8000 Cash 8000