On April 1, 2008, Company issued $600,000, 9% bonds for $645, 442 including accrued interest. Interest is payable annually on January 1, and the bonds mature on January 1, 2018. So the way I started the entry was:

April 1, 2008
DR Cash 645,442
CR Interest Payable (600,000 *.09*3/12)
CR Bonds Payable 631,942 (to balance)

is this right?

Then on December 31, 2008 I would need to accrue interest expense, but I don't understand it. The way I calculated it ended up CR Bonds Payable, but shouldn't it be a DR because the bond was sold at a premium? Any help would be really appreciated!

To determine if your entry for April 1, 2008, is correct, let's break down the components:

DR Cash: This is correct, reflecting the amount received from issuing the bonds, which is $645,442.

CR Interest Payable: To calculate the interest payable, you need to multiply the face value of the bonds ($600,000) by the interest rate (9%) and the number of months from issuance to the nearest interest payment date (3 months). Therefore, the correct calculation would be: $600,000 * 9% * 3/12 = $13,500. So the correct entry would be a credit of $13,500 to Interest Payable.

CR Bonds Payable: To balance the entry, you would record the remaining amount, which is the issue price minus the interest payable: $645,442 - $13,500 = $631,942. Therefore, the credit to Bonds Payable should be $631,942.

Your entry for April 1, 2008, is correct.

Now, let's move to December 31, 2008, and the accrual of interest expense.

When a bond is sold at a premium, it means that the issue price is higher than the face value of the bond. In this case, you issued the bond for $645,442, which is indeed a premium. This premium amount is amortized over the life of the bond, which creates the interest expense.

To calculate the interest expense, you need to determine the carrying value of the bond at the end of the period (December 31, 2008) and multiply it by the effective interest rate. The effective interest rate is the market interest rate at the time of issuance.

To calculate the carrying value, subtract the amortized premium from the face value of the bond. Since the bond was issued on April 1, 2008, this means that by December 31, 2008, nine months have passed. Therefore, you need to amortize 1/10th (9/90) of the premium each month.

Here's how you can calculate the carrying value and interest expense:

Carrying Value = Face Value - Amortized Premium
Carrying Value = $600,000 - ($45,442 * 9/90) = $600,000 - $5,044.67 = $594,955.33

Interest Expense = Carrying Value * Effective Interest Rate
Interest Expense = $594,955.33 * Effective Interest Rate

Once you determine the Effective Interest Rate, multiply it by the Carrying Value to calculate the Interest Expense.

Since the effective interest rate is not given in your question, you may need to refer to other information or use assumptions to determine it.

Once you have the interest expense, you can make the appropriate journal entry, which will debit Interest Expense and credit Bonds Payable for the interest expense amount.

Remember to adjust Interest Payable accordingly, as the interest has been accrued for the period.

I hope this helps clarify the process of recording the bond issuance and accruing interest expense. If you have any further questions, feel free to ask!