
a)
Prepare the journal entries to record the issuance of the bonds on April 1, 2018
a)

Explanation of Solution
Bonds: Bonds are a kind of interest bearing notes payable, usually issued by companies, universities and governmental organizations. It is a debt instrument used for the purpose of raising fund of the corporations or governmental agencies. If selling price of the bond is equal to its face value, it is called as par on bond. If selling price of the bond is lesser than the face value, it is known as discount on bond. If selling price of the bond is greater than the face value, it is known as premium on bond.
Prepare the
Date | Account title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
April 1, 2018 | Cash | 8,160,000 | ||
Premium on Bonds payable | 160,000 | |||
Bonds payable | 8,000,000 | |||
(To record the issuance of bonds) |
Table (1)
- Cash (asset) is increased. Thus, it is debited.
- Premium on Bonds payable (liability) is increased. Thus, it is credited.
- Bonds payable (liability) is increased. Thus, it is credited.
b)
Prepare the journal entries to record the payment of interest and amortization of bond premium on September 30, 2018.
b)

Explanation of Solution
Bond premium: Bond discount is the amount by which the selling price (or issue price or market price) of the bond is more than the face
Prepare the journal entries to record the payment of interest and amortization of bond premium on September 30, 2018:
Date | Account title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
September 30, 2018 | Bond Interest Expense (1) | 316,000 | ||
Premium on Bonds Payable | 4,000 | |||
Cash | 320,000 | |||
(To record the |
Table (2)
- Bond interest expense (decreases the equity) is increased. Thus, it is debited.
- Premium on bonds payable (liability) is decreased. Thus, it is debited.
- Cash (asset) is decreased. Thus, it is credited.
Working note:
Calculate the bond interest expense:
Semi-annual interest | $320,000 |
Less: Bond premium amortized | (4,000) |
Bond Interest expense | $316,000 |
(1)
Table (3)
c)
Prepare the journal entries to record the payment of interest and amortization of bond premium and retire the bonds at maturity on March 31, 2038.
c)

Explanation of Solution
Prepare the journal entries to record the payment of interest and amortization of bond premium and retire the bonds at maturity on March 31, 2038:
Date | Account title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
March 31, 2038 | Bond Interest payable | 160,000 | ||
Bond Interest Expense | 158,000 | |||
Premium on Bonds Payable | 2,000 | |||
Cash (2) | 320,000 | |||
(To record the final interest payment and amortized bond premium) | ||||
March 31, 2038 | Bond payable | 8,000,000 | ||
Cash | 8,000,000 | |||
(To record the retirement of bonds) |
Table (4)
To record the final interest payment and amortized bond premium:
- Bond interest payable (liability) is decreased. Thus, it is debited.
- Bond interest expense (decreases the equity) is increased. Thus, it is debited.
- Premium on bonds payable (liability) is decreased. Thus, it is debited.
- Cash (asset) is decreased. Thus, it is credited.
To record the retirement of bonds
- Bond payable (liability) is decreased. Thus, it is debited.
- Cash (asset) is decreased. Thus, it is credited.
Working notes:
Calculate the amount of cash has to be pay for the final interest payment and amortized bond premium:
Bond interest payable | $160,000 |
Bond premium amortized | 2,000 |
Bond interest amount | 158,000 |
The amount of cash has to pay for the final interest payment and amortized bond premium | $320,000 |
(2)
Table (5)
d)
Briefly explain the effect of amortizing the bond premium on (1) annual net income and (2) annual net
d)

Explanation of Solution
The effect of amortizing the bond premium on (1) annual net income, and (2) annual net cash flows from operating activities:
- 1) Amortizing the bond premium reduces the annual interest expense amount and this will results in increase in the annual net income.
- 2) Amortization of bonds premium is a non cash expense, part of the annual net interest expense. Therefore, it has no effect on the annual net cash flows from operating activities.
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