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.
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.
Compute the amount of bond interest expense.
Compute the amount of amortized premium.
Note: Refer to Equations (1) and (2) for both the values.
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Chapter 22A Solutions
College Accounting, Chapters 1-27
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