Question

Foreman Company issued $800,000 of 10%, 20-year bonds on January 1, 2017, at 119.792 to yield 8%. Interest is payable semi-annually on July 1 and January 1. Prepare the journal entries to record (a) the issuance of the bonds, (b) the payment of interest and the related amortization on July 1, 2017, and (c) the accrual of interest and the related amortization on December 31, 2017. (Round to the nearest dollar.)

Short answer

1. Premium on bond payable totals$158,336.
2. Premium of$1,666 will be amortized on 1 July 2017.
3. On December 31 2017 there was an accrual of interest expenses of$38,267.

Step-by-step solution

Definition of Bonds Payable

Bonds payable can be defined as the security issued by the business entity for generating cash for the business entity. These securities are debt securities.

Journal entry for issuance of bonds

Date	Accounts and Explanation	Debit $	Credit $
1 Jan 2017	Cash	$958,336
	Bond payable		$800,000
	Premium on bond payable		$158,336

Journal entry for interest and amortization

Date	Accounts and Explanation	Debit $	Credit $
1 July 2017	Interest expenses	$38,334
	Premium on bond payable	$1,666
	Cash		$40,000

Working note: Amortization table

Date	Cash interest at the stated rate on bond payable (5%)	Interest expenses at market rate on carrying value (4%)	Premium amortized	Unamortized premium	Bond payable	Carrying value
1 Jan 2017				$158,336	$800,000	$958,336
1 July 2017	$40,000	$38,334	$1,666	$156,670	$800,000	$956,670
31 Dec 2017	$40,000	$38,267	$1,733	$154,937	$800,000	$954,937

Accrual of interest and amortization

Date	Accounts and Explanation	Debit $	Credit $
31 Dec 2017	Interest expenses	$38,267
	Premium on bond payable	$1,733
	Interest payable		$40,000