Chapter 22A, Problem 1SEA

To determine

Journalize the entry for the semiannual interest payment and premium amortization in the books of Company H.

Explanation of Solution

Bonds: Bonds are the financial debt instruments issued by the corporations to raise capital for the purposes of purchasing assets, or paying debts. Bonds are bought by individual investors, or corporations, or mutual funds, and receive a fixed interest revenue.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Journalize the entry for the semiannual interest payment and premium amortization in the books of Company H.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
November	1	Bond Interest Expense			8,544
		Premium on Bonds Payable			456
			Cash			9,000
		(Record payment of semiannual interest and the amortization of premium)

Table (1)

Description:

• Bond Interest Expense is an expense account. Expenses reduce the stockholders’ equity account, and a decrease in equity is debited.
• Premium on Bonds Payable account is an adjunct-liability account, the account which increases the balance of the respective liability account. Since the premium is amortized, the premium value is reduced, and a decrease in liability is debited.
• Cash is an asset account. The amount is decreased because cash is paid, and a decrease in assets should be credited.

Working Notes:

Compute the cash paid.

$\begin{array}{c}\text{Cash paid = }\left\{\begin{array}{l}\text{Face value of the bonds×}\\ \text{Stated interest rate×}\\ \text{Semiannual interest payment period}\end{array}\right\}\\ \text{=\$200,000×9\%×}\frac{\text{1}}{\text{2}}\\ \text{=\$9,000}\end{array}$ (1)

Compute the amount of bond interest expense.

$\begin{array}{c}\text{Bond interest expense = }\left\{\begin{array}{l}\text{Carrying value of the bonds on May 1×}\\ \text{Market interest rate×}\\ \text{Semiannual interest payment period}\end{array}\right\}\\ \text{=\$213,591×8\%×}\frac{\text{1}}{\text{2}}\\ \text{=\$8,544}\end{array}$ (2)

Compute the amount of amortized premium.

$\begin{array}{c}\text{Premium amortized = Cash paid–Bond interest expense}\\ \text{=\$9,000–\$8,544}\\ \text{=\$456}\end{array}$

Note: Refer to Equations (1) and (2) for both the values.