Please Help Bonds Issued At A Premium Bunkichi Corporation
Please Help Mebonds Issued At A Premium Bunkichi Corporation Issued
Please help me!!! Bonds Issued At A Premium Bunkichi Corporation issued the following bonds at a premium: Date of issue and sale March 1, 20 Principal amount $800,000 Sale price of bonds 103 Denomination of bonds $1,000 Life of bonds 10 years Stated rate 8% payable semiannually on August 31 and February 28 1. Prepare journal entries for: a. Issuance of bonds at a premium b. Interest payment and premium amortization on the bonds on August 31, 20. c. Year end adjustment on the bonds for 20-1. d. Reversing entry for the beginning of 20-2. e. Interest payments and premium amortization on the bonds for 20-2 2. Calculate the carrying value of the bonds on August 31, 20-2
Paper For Above instruction
The issuance and management of bonds at a premium involve specific accounting treatments that reflect the true financial position of a company over time. Bunkichi Corporation issued bonds at a premium on March 1, 20, and the subsequent accounting entries include recording the initial bond issuance, periodic interest payments with amortization of the premium, year-end adjustments, reversal entries, and calculation of the bonds’ carrying value. This paper systematically addresses each of these accounting activities, illustrating the application of relevant accounting principles and formulas.
Issuance of Bonds at a Premium
On March 1, 20, Bunkichi Corporation issued bonds with a face value of $800,000 at a sale price of 103, indicating that the bonds were issued at 103% of their face value. The issue price of bonds at a premium is computed as:
\[ \text{Issue Price} = \text{Principal} \times \frac{\text{Sale Price}}{100} = \$800,000 \times 1.03 = \$824,000 \]
The journal entry to record this issuance is:
```plaintext
Debit Cash: $824,000
Credit Bonds Payable: $800,000
Credit Premium on Bonds Payable: $24,000
```
This reflects that the company received $824,000 from bondholders and records the bonds payable at face value, with the premium component recognized separately.
Interest Payment and Premium Amortization on August 31, 20
Interest on bonds with a stated rate of 8% payable semiannually results in an interest expense calculation based on the effective interest method. The semiannual interest payment is:
\[ \text{Interest Payment} = \text{Principal} \times \text{Stated Rate} \div 2 = \$800,000 \times 8\% \div 2 = \$32,000 \]
However, the amortization of the premium for each period adjusts the interest expense to reflect the true cost of borrowing, which is based on the effective interest rate. The effective interest rate is derived from the market price of the bonds ($824,000) and the cash flows, but for simplicity, assuming the market rate approximates the stated rate and the premium amortization is straight-line:
\[ \text{Premium amortization per period} = \frac{\$24,000}{\text{Total periods}} = \frac{\$24,000}{20} = \$1,200 \]
Each interest period involves a journal entry:
```plaintext
Debit Interest Expense: $30,800
Debit Premium on Bonds Payable: $1,200
Credit Cash: $32,000
```
This reflects that the actual interest expense ($30,800) is less than the cash paid due to amortization of the premium.
Year-End Adjustment for 20-1
At year-end, an adjusting entry recognizes accrued interest or adjusts the premium account. Assuming the bonds’ interest expense needs to be accrued, the entry would be:
```plaintext
Debit Interest Expense: $61,600
Credit Premium on Bonds Payable: $2,400
Credit Interest Payable: $64,000
```
(For the two periods in a year, totaling $64,000 interest cash outflow, with amortization totaling $2,400).
Reversing Entry for the Beginning of 20-2
At the start of the new fiscal year, the reversing entry negates the accrued interest expenses:
```plaintext
Debit Interest Payable: $64,000
Credit Interest Expense: $61,600
Credit Premium on Bonds Payable: $2,400
```
Interest Payments and Premium Amortization for 20-2
Similar to 20-1, each semiannual period involves interest payments of $32,000, with premium amortization of $1,200 per period, adjusting interest expense to reflect the effective interest rate.
Carrying Value of Bonds on August 31, 20-2
The carrying value of bonds is calculated as:
\[ \text{Carrying Value} = \text{Initial Issue Price} + \text{Amortized Premium} \]
Amortization over periods causes the carrying amount to approach the face value. After two periods, the carrying value is:
\[ \text{Initial Price} + 2 \times \$1,200 = \$824,000 + \$2,400 = \$826,400 \]
Thus, on August 31, 20-2, the bonds' carrying value is approximately $826,400.
In conclusion, the issuance of bonds at a premium, along with subsequent interest payments, amortizations, adjustments, and calculation of the carrying amount, requires meticulous application of accounting principles to ensure accurate financial reporting. These procedures reflect the real cost of borrowing and the company's financial position regarding long-term debt.
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