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Manilow Company issued $700,000, 9%, 20-year bonds on January 1, 2014, at 103. Interest is...

Question:

Manilow Company issued $700,000, 9%, 20-year bonds on January 1, 2014, at 103. Interest is payable semiannually on July 1 and January 1. Manilow uses straight-line amortization for bond premium or discount. Prepare the journal entries to record the following.

a) The issuance of the bonds.

b) The payment of interest and the premium amortization on July 1, 2014, assuming that interest was not accrued on June 30.

c) The accrual of interest and the premium amortization on December 31, 2014.

d) The redemption of the bonds at maturity, assuming interest for the last interest period has been paid and recorded.

Long-Term Financing

Companies with a plan of expanding its business reach like new branches or factory or purchasing an existing business must raise funds in achieving that objective. Funds can obtain in the market by issuing corporate bonds, long-term ones for prospective investors and must disclose the purpose of raising debt and interest that investor will receive from the company or the bondholder.

Answer and Explanation:

a) The issuance of the bonds.

Accounts Debit Credit
Cash (700,000 * 103) 721,000
Premium on Bonds Payable (721,000 - 700,000) 21,000
Bonds Payable 700,000

b) The payment of interest and the premium amortization on July 1, 2014, assuming that interest was not accrued on June 30.

Accounts Debit Credit
Premium on Bonds Payable (21,000 / 20 years / 2) 525
Interest Expense (700,000 * 9% * 6 / 12) - 525 30,975
Cash 31,500

c) The accrual of interest and the premium amortization on December 31, 2014.

Accounts Debit Credit
Premium on Bonds Payable (21,000 / 20 years / 2) 525
Interest Expense (700,000 * 9% * 6 / 12) - 525 30,975
Interest Payable 31,500

d) The redemption of the bonds at maturity, assuming interest for the last interest period has been paid and recorded.

Accounts Debit Credit
Bonds Payable 700,000
Cash 700,000

Learn more about this topic:

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Sources of Long-Term Financing

from Business 100: Intro to Business

Chapter 23 / Lesson 4
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