Question

Woodwick Company issues 10%, five-year bonds, on December 31, 2016, with a par value of \(200,000 and semiannual interest payments. Use the following bond amortization table and prepare journal entries to record

(a) the issuance of bonds on December 31, 2016;

(b) the first interest payment on June 30, 2017; and

(c) the second interest payment on December 31, 2017.

Semiannual Period-End	Unamortized Premium	Carrying Value
12/31/2016	\) 16,222	\( 216,222
6/30/2017	\) 14,600	\( 214,600
12/31/2017	\) 12,978	$ 212,978

Short answer

(a) Journal entry is recorded in Step 3.

(b) Journal entry is recorded in Step 4.

(c) Journal entry is recorded in Step 5.

Step-by-step solution

Calculation of premium on bonds payable  

$\begin{array}{rcl}\mathbf{PremiumonBondpayable}& \mathbf{=}& \mathbf{Issueprice}-\mathbf{Parvalue}\\ & \mathbf{=}& \mathbf{\$}\mathbf{216}\mathbf{,}\mathbf{222}-\mathbf{\$}\mathbf{200}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{16}\mathbf{,}\mathbf{222}\\ & & \end{array}$

Calculation of interest expense per period

Ten payments of $10,000 (10 pymts × [$200,000 × 0.1 × 1∕2 yr]	$100,000
Less Premium	$16,222
Total bond interest expense	$83,788
Bond interest expense ($83,788 /10)	$8,378

(a) Journal entry for issuance of bonds on December 31,2016

Date	Account and explanation	Debit	Credit
December 31, 2016	Cash	$216,222
	Premium on Bonds Payable		$16,222
	Bonds Payable		$200,000
	(Sold bonds for cash at a Premium on their issue date.)

(b) Journal entry for first interest payment

Date	Account and explanation	Debit	Credit
Dec. 31, 2018	Bond Interest Expense	$8,378
	Premium on Bonds Payable	$1,622
	Cash		$10,000
	(Pay semi-annual interest and record amortization)

(c) Journal entry for second interest payment

Date	Account and explanation	Debit	Credit
Dec. 31, 2018	Bond Interest Expense	$8,378
	Premium on Bonds Payable	$1,622
	Cash		$10,000
	(Pay semi-annual interest and record amortization)