Prepare the entry to record the accrued interest and the amortization of premium on December 31, 2010 using the straight-line method.
INFO:
Sharapove Co common stock, $100 par 200 shares $37,400
U.S. government bonds, 11%, due 4/1/2020, interest payable 4/1 & 10/1, 110 bonds of $1,000 par each $110,000
McGrath Co 12% bonds, par $50,000 dated 3/1/10 purchased at 104 plus accrued interest, interest payable annually on 3/1, due 3/1/2030 $54,000
To prepare the entry for accrued interest and the amortization of premium using the straight-line method, you need to follow a few steps:
1. Calculate the straight-line amortization of the premium.
- First, determine the premium amount by subtracting the face value of the bond from the purchase price. In this case, it is $54,000 - $50,000 = $4,000.
- Next, divide the premium amount by the number of years until maturity. Since the bond matures on 3/1/2030 and it was purchased on 3/1/2010, there are 20 years until maturity. Therefore, the straight-line amortization per year is $4,000 / 20 years = $200 per year.
2. Calculate the accrued interest for the year.
- Determine the number of days from the last interest payment date (3/1/2010) to the end of the year (12/31/2010). In this case, it is 10 months or 305 days (ignoring leap year).
- Divide the annual interest rate by the number of days in a year (365 days) to determine the daily interest rate. For the McGrath Co bonds with a 12% annual interest rate, the daily interest rate is 12% / 365 = 0.0329%.
- Multiply the daily interest rate by the number of days to get the accrued interest for the year. 0.0329% * 305 days = 1%.
Now let's prepare the entry:
1. Accrued Interest:
- Debit: Accrued Interest Expense
- Credit: Bond Interest Payable
To record the accrued interest on December 31, 2010, you would debit the Accrued Interest Expense account for the accrued interest amount and credit the Bond Interest Payable account.
2. Amortization of Premium:
- Debit: Bond Interest Expense
- Credit: Premium on Bonds Payable
To record the amortization of premium on December 31, 2010, you would debit the Bond Interest Expense account for the straight-line amortization amount and credit the Premium on Bonds Payable account.
Note: The entries for Sharapove Co common stock and U.S. government bonds are not required for this specific question on accrued interest and amortization of premium.
To record the accrued interest and the amortization of premium on December 31, 2010 using the straight-line method, follow these steps:
1. Determine the total premium paid for the McGrath Co bonds. The premium paid is the purchase price minus the face value of the bonds. In this case, the premium paid is $54,000 - $50,000 = $4,000.
2. Calculate the annual premium amortization by dividing the total premium paid by the number of years until maturity. The McGrath Co bonds mature on 3/1/2030, so there are 20 years until maturity. Therefore, the annual premium amortization is $4,000 / 20 = $200 per year.
3. Prepare the journal entry for the accrued interest on the McGrath Co bonds. The accrued interest is the interest earned from the last payment date (3/1/2010) to the end of the current year (12/31/2010).
Debit: Bond Interest Expense - McGrath Co
Credit: Accrued Interest Payable - McGrath Co
4. Prepare the journal entry for the premium amortization on the McGrath Co bonds.
Debit: Bond Interest Expense - McGrath Co
Credit: Premium on Bonds Payable - McGrath Co
Please note that I have assumed that the interest payment dates for the McGrath Co bonds are not provided. If the interest payment dates are provided, you will need to adjust the journal entries accordingly.