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Aggies Inc. issued bonds with a $500,000 face value, 10% interest rate, and a 4-year term on July 1, 2018, and received $540,000. Interest is payable semi-annually. The premium is amortized using the straight-line method. Prepare journal entries for the following transactions. A. July 1, 2018: entry to record issuing the bonds B. Dec. 31, 2018: entry to record payment of interest to bondholders C. Dec. 31, 2018: entry to record amortization of premium

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Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
FindFindarrow_forward

Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
Chapter 13, Problem 6PA
Textbook Problem
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Aggies Inc. issued bonds with a $500,000 face value, 10% interest rate, and a 4-year term on July 1, 2018, and received $540,000. Interest is payable semi-annually. The premium is amortized using the straight-line method. Prepare journal entries for the following transactions.

A. July 1, 2018: entry to record issuing the bonds

B. Dec. 31, 2018: entry to record payment of interest to bondholders

C. Dec. 31, 2018: entry to record amortization of premium

To determine

Introduction:

Journal entries record business transactions. These transactions have double effect on accounts such that total of all assets equate with liabilities and equities.

To prepare:

Journal entries for the given transactions.

Explanation of Solution

Record issuance of bond:

Date Account Debit ($) Credit ($)
July 1, 2018 Cash 540,000
Premium on bond payable 40,000
Bond payable 500,000
(To record issuance of bond.)

Table (1)

  • Cash is an asset and it is increased by $540,000. Therefore, cash is debited with $540,000.
  • Premium on bond payable is a contra liability account and it is decreased by $40,000. Therefore, premium on bond payable is credited with $40,000.
  • Bond payable is a liabilty account and it is increased by $500,000. Therefore, bond payable is credited with $500,000.

Record interest expense:

Date Account Debit ($) Credit ($)
Dec 31, 2018 Interest Expense ($500,000×5%) 25,000
Cash 25,000
(To record interest expense on bonds payable

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Chapter 13 Solutions

Principles of Accounting Volume 1
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