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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Cornerstone ExerciseDebt Issued at a Premium (Straight Line)

Refer to the information for Ironman Steel above.

Required:

Prepare the necessary journal entry on December 31,2023, assuming the straight-line method is followed.

To determine

Concept introduction:

Bonds:

Bonds are debt instruments issued by the borrower company to its lenders. Bonds are issued at a specified rate of interest and for a specified time period. The bondholders get a fixed rate of interest on the bonds and repayment of the bonds at the maturity date.

Amortization of Bonds premium or discount:

Bonds may be issued at a premium or discount. The premium or discount on issue of binds is amortized or the life of bonds using the straight line or effective rate methods.

To prepare:

The Journal entry as on Dec. 31, 2021.

Explanation

The Amortization table for Bonds is explained as follows:

Drew Company
Amortization Table
Straight line method
Date Bonds Par value Interest Payment Premium amortized Unamortized Premium Interest Expense Bonds Carrying Value
A B = A*7% C = 40000/8 D = D-C E = B-C F = A+D
Jan. 1, 2020 1,300,000 - - 40,000 - 1,340,000
Dec. 31, 2020 1,300,000 91,000 5,000 35,000 86,000 1,335,000
Dec. 31, 2021 1,300,000 91,000 5,000 30,000 86,000 1,330,000
Dec. 31, 2022 1,300,000 91,000 5,000 25,000 86,000 1,325,000
Dec. 31, 2023 1,300,000 91,000 5,000 20,000 86,000 1,320,000
Dec...

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