CHAPTER9 LECTURE EXAMPLE5 Story Company issued $380,000, 7%, 10-year bonds on Ja

Question

CHAPTER9 LECTURE EXAMPLE5 Story Company issued $380,000, 7%, 10-year bonds on January 1, 2016, for $407,968. This price resulted in an effective interest rate of 6% on the bonds. Interest is payable annually on January 1. Story uses the effective interest method to amortize bond premiums and discounts. Prepare the journal entries to record: 1. The issuance of the bonds. 2· The accrual of interest and the premium or discount amortization on December 31, 2016. 3. The payment of interest on January 1, 2017. Also, what amounts would be shown on December 31, 2016 financial statements?

Explanation / Answer

Journal Entries :

Balance Sheet (abstract) as on Dec 31, 2016 :

Requirement Date Accounts Titles and explanation Debit $ Credit $ 1 Jan 1 16 Cash 407968 Note Payable 380000 Premium on the Note issue 27968 (being issue of note at premium) 2 Dec 31 16 Interest Expense 24478 Premium on the Note Issue (407968*6%-26600) 2122 Interest payable (380000 * 7%) 26600 (being the interest expense and amortisation of premium booked) 3 Jan 1 17 Interest payable 26600 Cash 26600 (being payment of the interest)

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