Question

Assume the bonds in BE14-6 were issued for $644,636 and the effective-interest rate is 6%. Prepare the company’s journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry.

Short answer

The total for both the debit and credit sides is $686,636.

Step-by-step solution

Meaning of Premium on Bond Payable

Premium on bond payablerefers to the cash received over the par value of the issued bond. It is credited in account "premium on bond payable" and amortized over the maturity period.

Journal Entries

Journal Entries
Date	Accounts and Explanation	Debit	Credit
January 1, 2017	Cash	$644,636
	Bonds Payable		$600,000
	Premium on Bonds Payable		$44,636
July 1, 2017	Interest expenses	$19,339.08
	Premium on Bonds Payable	$1,660.92
	Cash		$21,000.00
December 31, 2017	Interest expenses	$19,289.25
	Premium on Bonds Payable	$1,710.75
	Interest Payable ($600,000 x 7% x 1/2)		$21,000

Working:

Premium on bonds payable on January 1= ($644,636-$600,000)= $44,636

Interest expenses on July 1 = (644,636 x 6% x 1/2)= $19,339.08

Premium on bond payable on July 1 ($21,000-19,339.08) = $1,660.92

Interest paid in cash paid on July 1= ($600,000 x 7% x 1/2) = $21,000.

Interest expenses on December 31 = {(644,636 -$1,660.92)x 6% x 1/2} =$19,289.25

Interest payable on December 31, 2017=($600,000 x 7% x 1/2) =$21,000

Premium on bond payable on December 31 ($21,000-19,289.25) = $1,710.75.