BOND ISSUED AT A PREMIUM - STRAIGHT LINE METHOD

The amount of premium in this case, is evenly distributed among the semi-annual periods.
Amount to be debited to Premium on Bonds Payable Account is obtained by dividing the
premium by the number of semi-annual periods in the bond agreement. The amount of interest
expense would be equal throughout the semi-annual period on the bond agreement.

Venture Company bond issued;

The stated rate of the bond = 10%

10 %
The interest is payable semi-annually hence periodic interest of the bond is = = 5%
2

The amount of interest payable semi-annually is = 5% × 600,000 = 30000

600000
The par value of the bond is = 100, hence the no. of bonds = = 6000
100

The market value of the bond = 103, hence the bond proceeds is = 6000 × 103 = 618000

The Face value of the bond = 600000

Therefore, the amount of premium on the bond = 618000 – 600000 = 18000

18000
Premium amortization over 20 years semi-annually on straight line basis = = 450
40

Hence, interest expense paid semi-annually for 20 years = interest (30000) – semi-annual
premium amortized (450) = 29550

a)

Journal Entries for a Bond Sold at a Premium – Straight Line Method

Date Account name Debit Credit

1-Jan-2017 Cash 618,000

Premium on Bond payable 18000

Bond payable 600000

 (To record issuance of bond at a premium)

b)

Date Account name Debit Credit

30-Jun-2017 Interest Expense 29550

Premium on Bonds Payable 450

Cash 30000

(To record payment of the first interest and the amortization of bond premium)

c)

Date Account name Debit Credit

31-Dec-2037 Interest Expense 29550

Premium on Bonds Payable 450

Cash 30000

(To record payment of the last interest and the amortization of bond premium)

d)

Date Account name Debit Credit

31-Dec-2037 Bonds Payable 600000

Cash 600000

(To record retirement of the bonds at maturity)