Bonds Issued At A Premium - Bunkichi Corporation

Bonds Issued At A Premium Bunkichi Corporation Issued The Following Bo

This assignment involves preparing journal entries for bonds issued at a premium by Bunkichi Corporation, as well as recording interest payments, premium amortization, year-end adjustments, reversing entries, and calculating the bonds' carrying value at a specified date. The scenario provides specific dates, amounts, bond terms, and interest payment details, focusing on accurate accounting treatment for bond issuance and subsequent periods.

Paper For Above instruction

The issuance of bonds at a premium reflects that the bonds were sold at a price above their face value, which impacts journal entries and the amortization schedule throughout the bond's lifespan. Accurate recording ensures the financial statements correctly depict liabilities, interest expense, and bond valuation over time.

1. Bond Issuance at a Premium

On March 1, 20, Bunkichi Corporation issued bonds with a principal amount of $800,000. The bonds were sold at 103, meaning 103% of the face value, resulting in a sale price of $824,000. Given the bonds have a denomination of $1,000, and a total principal of $800,000, the number of bonds issued equals 800 bonds ($800,000 / $1,000). The journal entry to record the issuance recognizes cash received, bonds payable at face value, and the premium.

Journal Entry on March 1, 20:

Debit: Cash $824,000


Credit: Bonds Payable $800,000


Credit: Premium on Bonds Payable $24,000

This entry records the receipt of cash at a premium and establishes the bond liability.

2. Interest Payment and Premium Amortization on August 31, 20

Interest for semiannual periods is based on the stated rate of 8% annual interest, payable twice a year. The semiannual interest payment is:

Interest = Principal x Semiannual rate = $800,000 x 4% = $32,000

The amortization of the bond premium reduces interest expense over the life of the bonds. Using the effective interest method, interest expense is calculated as:

Interest Expense = Carrying amount x semiannual market rate

However, in the provided solution, the interest expense recognized on August 31, 20, is $30,800, with a premium amortization of $1,200, and the interest payable is $20,000, indicating adjustments based on the amortization schedule. The journal entry for interest payment and amortization on August 31, 20, is:

Debit: Interest Expense $30,800


Debit: Bonds Payable Premium $1,200


Credit: Interest Payable $20,000

This entry shows the interest expense adjusted for premium amortization and the payment of interest payable, reducing the premium account accordingly.

3. Year-End Adjustment for 20-1

At year-end, an adjustment accounts for accrued interest and amortizes additional premium. The entry as per the solution is:

Debit: Interest Expense $20,533


Debit: Bonds Payable Premium $800


Credit: Interest Payable $21,333

This adjustment records accrued interest and amortizes remaining premium, aligning the bond's carrying amount with its effective interest rate.

4. Reversing Entry for the Beginning of 20-2

Reversing entries are used to simplify subsequent recording of interest transactions. As per the solution, at the start of 20-2, the reversing entry is:

Debit: Interest Payable $21,333


Debit: Bonds Payable Premium $800


Credit: Interest Expense $20,533

This reverses the previous year's accrual, preparing for the upcoming interest payments.

5. Interest Payments and Premium Amortization for 20-2

During 20-2, interest payments and amortization are recorded for two periods—February and August. Based on the solution, the entries are:

  • February:
Debit: Interest Expense $10,667


Credit: Interest Payable $32,000


Debit: Premium Amortization $400
  • August:
Debit: Interest Expense $30,800


Credit: Interest Payable $32,000


Debit: Premium Amortization $1,200

The premium amortization reduces the bond's carrying amount over time, reflecting decreasing premium as interest expense is recognized.

6. Calculation of the Bond's Carrying Value on August 31, 20-2

Starting with the principal amount of $800,000, the premium balance on March 1, 20, was $24,000. Deducting the total amortized premiums ($1,200 on August 31, 20-1, and subsequent amortizations), the updated carrying amount is calculated as follows:

Initial book value: $824,000


Less total amortization of premiums: ($1,200 + additional amortizations)


Final book value on August 31, 20-2: $816,000

This reflects the bond's adjusted carrying value, which decreases as the premium is amortized over successive periods.

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