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Ritter Company issues $600,000 of 10%, 10-year bonds on January 1, 2008 at 102. Interest is...

Question:

Ritter Company issues $600,000 of 10%, 10-year bonds on January 1, 2008 at 102. Interest is payable semiannually on July 1 and January 1. The company uses the straight-line method of amortization.Instructions.

Journalize the entries for the bonds on(1) January 1, 2008, (2) July 1, 2008, and (3) December 31, 2008.

Long-Term Debt

Long-Term debt is an obligation or commitment with a settlement or payment date of more than one year from the time the debt arises. In the balance sheet, it is normally classified as non-current liabilities until such time it can be reclassified as current liabilities.

Answer and Explanation:

To record the issuance of bonds at 102 on January 1, 2008. If the issue value is above the par value, it is said that the bonds are issued at a premium.

Accounts Debit Credit
Cash (600,000 * 102) 612,000
Premium on Bonds Payable (612,000 - 600,000) 12,000
Bonds Payable 600,000

To record the payment of interest on July 1, 2008. In amortizing the premium on bonds payable, the amortized amount is spread evenly over the life of the bonds up to its maturity date.

Accounts Debit Credit
Premium on Bonds Payable (12,000 / 10 yrs / 2) 600
Interest Expense (600,000 * 10% * 6 / 12 - 600) 29,400
Cash 30,000

To record the accrual of interest as of December 31, 2008.

Accounts Debit Credit
Premium on Bonds Payable (12,000 / 10 yrs / 2) 600
Interest Expense (600,000 * 10% * 6 / 12 - 600) 29,400
Accrued Interest Payable 30,000

Learn more about this topic:

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Long-Term Debt: Definition, Cost & Formula

from Financial Accounting: Help and Review

Chapter 8 / Lesson 7
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