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Q7BE

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Intermediate Accounting (Kieso)
Found in: Page 753

Short Answer

Teton Corporation issued $600,000 of 7% bonds on November 1, 2017, for $644,636. The bonds were dated November 1, 2017, and mature in 10 years, with interest payable each May 1 and November 1. Teton uses the effective-interest method with an effective rate of 6%. Prepare Teton’s December 31, 2017, adjusting entry.

The total for both the debit and credit sides is $7,000.

See the step by step solution

Step by Step Solution

Meaning of Effective Interest Method

In the effective interest rate method difference between interest expenses on the bond's issue price at the effective interest rate and interest payable at the coupon rate is amortized as a premium or discount.

Journal Entries

Adjusting journal entries for interest expenses is recorded on December 31, 2017.

Journal Entries

Date

Accounts and Explanation

Debit

Credit

December 31, 2017

Interest expenses

$6,446.36

Premium on Bonds Payable

$553.64

Interest Payable

$7,000

Working:

Interest expenses on December 31 = ($644,636 x 6% x 2/12) = $6,446.36

Interest payable on December 31, 2017 = ($600,000 x 7% x 2/12) = $7,000

Premium on bond payable on December 31 = ($7,000-$6,446.36) = $553.64

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