Ch 9 - Willy Wonka Example w. answers

Ch 9 - Willy Wonka Example w. answers - Jan 1, 2007 Cash...

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Willy Wonka Example The Willy Wonka Company issued 5 year, $500,000 par value bonds paying interest semiannually on January 1 and July 1. The bonds are dated January 1, 2007 with a stated rate of interest of 12%. The market rate of interest for such bonds on January 1, 2007, is 10%. Bonds were issued at a price of 108. 1. Were the bonds issued at a premium or discount? Premium since the market rate is less than the face rate. Also, 108 represents the issue price percentage of face value. If the percent is above 100, then bonds are issued at a premium. If below, then a discount. 2. What is the premium or discount amount? Issue price = 108% * $500,000 = $540,000 Issue price – face value = premium amount 540,000 – 500,000 = $40,000 3. Prepare the journal entry for the issuance.
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Unformatted text preview: Jan 1, 2007 Cash $540,000 Bond payable 500,000 Premium on Bonds 40,000 4. Prepare the journal entry for the first interest payment. Premium on bonds is amortized every time an interest payment is made. Therefore, $40,000 is divided by 10 since there are 10 interest payments. $4,000 is amortized every interest payment. July 1, 2007 Interest Expense 26,000 Premium on Bonds 4,000 Cash 30,000 This JE will be prepared whenever an interest payment is made. 5. Prepare the adjusting journal entry if the companys year end is December 31. You must record the amount of interest that will be paid out on January 1, 2008. Dec 31, 2007 Interest Expense 26,000 Premium on Bonds 4,000 Bond Interest Payable 30,000...
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