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(TCO D) On January 1, 2010, Solis Co. issued its 10% bonds in the face amount...

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Accounting

(TCO D) On January 1, 2010, Solis Co. issued its 10% bonds inthe face amount of $3,000,000, which mature on January 1, 2020. Thebonds were issued for $3,405,000 to yield 8%. Solis uses theeffective-interest method of amortizing bond premium. Interest ispayable semi-annually on July 1st and January 1st each year . AtDecember 31, 2010, Please show the Journal entries to record theabove:

1. Journal entry to record the Issue of Bonds on January 1,2010.

2. Journal Entry to record the payment of Interest on July 1st,2010 and January 1st, 2011. Be sure to record any adjusting entryfor December 31st, 2010.

3. What is the Unamortized Discount or Premium Balance on BondsPayable as of December 31st, 2011?? (Using the Effective InterestMethod)

(Hint: Prepare yourself a Schedule like in the textbook to helpyou do this problem) (Round each answers to nearest dollar whenpreparing your schedule.)

Answer & Explanation Solved by verified expert
3.7 Ratings (692 Votes)

Solution 1:

Journal Entries
Date Particulars Debit Credit
1-Jan-10 Cash Dr $3,405,000.00
         To Bond Payable $3,000,000.00
         To Premium on bond payable $405,000.00
(To record issue of bond at premium)

Solution 2:

Journal Entries - Solis Co.
Date Particulars Debit Credit
1-Jul-10 Interest expense Dr ($3,405,000*4%) $136,200.00
Premium on bond payable Dr $13,800.00
         To Cash ($3,000,000*5%) $150,000.00
(To record interest payment and premium amortization)
31-Dec-10 Interest expense Dr [($3,405,000 - $13,800)*4%] $135,648.00
Premium on bond payable Dr $14,352.00
         To Interest Payable ($3,000,000*5%) $150,000.00
(To record interest payment and premium amortization)
1-Jan-11 Interest Payable Dr $150,000.00
         To Cash $150,000.00
(To record payment of interest)

Solution 3:

Bond Amortization Schedule
Period Cash Paid Interest Expense Premium amortization Unamortized Premium Carrying value
1-Jan-10 $405,000 $3,405,000
30-Jun-10 $150,000 $136,200 $13,800 $391,200 $3,391,200
31-Dec-10 $150,000 $135,648 $14,352 $376,848 $3,376,848
30-Jun-11 $150,000 $135,074 $14,926 $361,922 $3,361,922
31-Dec-11 $150,000 $134,477 $15,523 $346,399 $3,346,399

Unamortized premium balance on bond payable as of December 31, 2011 = $346,399
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