Question

Assume the same information as in E14-4, except that Celine Dion Company uses the effective-interest method of amortization for bond premium or discount. Assume an effective yield of 9.7705%

Instructions

Prepare the journal entries to record the following. (Round to the nearest dollar.)

(a) The issuance of the bonds.

(b) The payment of interest and related amortization on July 1, 2017.

(c) The accrual of interest and the related amortization on December 31, 2017.

Short answer

(a) The bonds are issued at$612,000.

(b) The business entity amortized a $102 premium on bonds payable.

(c) The business entity amortized a $107premium on bonds payable.

Step-by-step solution

Definition of Bonds Payable

Bond payable can be defined as the securities that are issued by the business to creditors for generating cash. It is reported as the non-current liability of the business entity.

Issuance of the bonds

Date	Accounts and explanation	Debit $	Credit $
1 Jan 2017	Cash$\mathbf{(}\mathit{\$}\mathbf{600}\mathbf{,}\mathbf{000}\mathbf{\times }\frac{\mathbf{\$}\mathbf{102}}{\mathbf{\$}\mathbf{100}}\mathbf{)}$	$612,000
	Premium on bond payable		$12,000
	Bonds payable		$600,000
	(To record the issue of bonds on premium)

Payment of interest and related amortization

Date	Accounts and Explanation	Debit $	Credit $
1 July 2017	Interest expenses	$29,898
	Premium on bond payable	$102
	Cash		$30,000
	(To record the payment of interest and amortization of premium)

Working note:

Calculation of premium amortized:

Particular	Amount $
Interest @ 9.7705% on the book value of bond payable$(\$612,000\times 9.7705\%\times \frac{1}{2})$	$29,898
Interest @ 10% on bond payablerole="math" localid="1658993146314" $(\$600,000\times 10\%\times \frac{1}{2})$	($30,000)
Amortization of premium	$102

Accrual of interest

Date	Accounts and Explanation	Debit $	Credit $
12 Dec 2017	Interest expenses	$29,893
	Premium on bond payable	$107
	Interest payable		$30,000
	(To record the accrual of interest)

Particular	Amount $
Interest @ 9.7705% on the book value of bond payable$((\$612,000-\$102)\times 9.7705\%\times \frac{1}{2})$	$29,893
Interest @ 10% on bond payable $(\$600,000\times 10\%\times \frac{1}{2})$	($30,000)
Amortization of premium	$107