Question

On January 1, 2017, Aumont Company sold 12% bonds having a maturity value of \(500,000 for \)537,907.37, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2017, and mature January 1, 2022, with interest payable December 31 of each year. Aumont Company allocates interest and unamortized discount or premium on the effective-interest basis.

Instructions

(Round answers to the nearest cent.)

1. Prepare the journal entry at the date of the bond issuance.
2. Prepare a schedule of interest expense and bond amortization for 2017–2019.
3. Prepare the journal entry to record the interest payment and the amortization for 2017.
4. Prepare the journal entry to record the interest payment and the amortization for 2019.

Short answer

1. Premium on bonds payable is $37,907.37
2. At the end of every year, cash paid is $60,000
3. Premium on bond payable is $6,209.26
4. Interest expense is $52,486.79

Step-by-step solution

Meaning of Amortization

Amortization refers to recompensing a debt through normal, pre-arranged installments that incorporate principal and interest. Principal and interest payments are made in each circumstance where the term "amortization" is pertinent.

(a) Preparing journal entry

Date	Particulars	Debit ($)	Credit ($)
Jan. 1, 2017	Cash	537,907.37
	Premium on bonds payable		37,907.37
	Bonds payable		500,000.00

(b) Preparing a schedule of interest expense and bond amortization

Schedule of Interest expense and Bond Premium Amortization Effective-Interest method 12% Bonds Sold to Yields 10%

Date	Cash Paid	Interest Expense	Premium Amortized	Carrying Amounts of Bonds
1/1/17	-	-	-	$537,907.37
12/31/17	$60,000.00	$53,790.74	$6,209.26	531,698.11
12/31/18	60,000.00	53,169.81	6,830.19	524,867.92
12/31/19	60,000.00	52,486.79	7,513.21	517,354.71

Working note:

Calculation of Cash paid

$\begin{array}{rcl}\mathbf{Cash}\mathbf{}\mathbf{Paid}& \mathbf{=}& \mathbf{Maturity}\mathbf{}\mathbf{value}\mathbf{\times }\mathbf{Bond}\mathbf{}\mathbf{rate}\\ & \mathbf{=}& \mathbf{\$}\mathbf{500}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{12}\mathbf{\%}\\ & \mathbf{=}& \mathbf{\$}\mathbf{60}\mathbf{,}\mathbf{000}\end{array}$

(c) Preparing journal entry

Date	Particulars	Debit ($)	Credit ($)
Dec. 31, 2017	Interest expense	53,790.74
	Premium on bond payable	6,209.26
	Cash		60,000.00

(d) Preparing journal entry

Date	Particulars	Debit ($)	Credit ($)
Dec. 31, 2019	Interest expense	52,486.79
	Premium on bond payable	7,513.21
	Cash		60,000.00