On January 1, 2017, Pharoah Corporation issued $450,000 of 7% bonds, due in 8 ye

Question

On January 1, 2017, Pharoah Corporation issued $450,000 of 7% bonds, due in 8 years. The bonds were issued for $478,264, and pay interest each July 1 and January 1. The effective-interest rate is 6%.

Prepare the company’s journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry. Pharoah uses the effective-interest method.

No.Date Account Titles and Explanation Debit Credit (a) January 1, 2017 Cash 478264 Premium on Bonds Payable 28264 Bonds Payable 450000 (b) July 1, 2017 Interest Expense Premium on Bonds Payable Cash c) December 31, 2017 interest Expense Premium on Bonds Payable Interest Payable

Explanation / Answer

a) Cash 478264 Premium on bonds payable 28264 Bonds payable 450000 b) Interest expense (478264*6%*1/2) 14348 Premium on bonds payable 1402 Cash (450000*7%*1/2) 15750 c) Interest expense (478264-1402)*6%*1/2 14306 Premium on bonds payable 1444 Interest payable (450000*7%*1/2) 15750

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