Prepare the necessary journal entries to record the following transactions relating to the long-term issuance of bonds of Sloan Co.:
March 1
Issued $600,000 face value Sloan Co. second mortgage, 8% bonds for $654,120, including accrued interest. Interest is payable semiannually on December 1 and June 1 with the bonds maturing 10 years from this past December 1. The bonds are callable at
102.
June 1
Paid semiannual interest on Sloan Co. bonds. (Use straight-line amortization of any premium or discount.)
December 1
Paid semiannual interest on Sloan Co. bonds and purchased $300,000 face value bonds at the call price in accordance with the provisions of the bond indenture.
March 1: Cash ................................................................................ 654,120
Bonds Payable ........................................................... 600,000
Premium on Bonds Payable ...................................... 42,120
Interest Expense ($600,000 × 8% × 3/12) ................ 12,000
June 1: Interest Expense .................................................................... 22,920
Premium on Bonds Payable ($42,120 × 3/117) .................... 1,080 (WHY IS 3 DIVIDED BY 117?)
Cash ........................................................................... 24,000
Dec. 1: Interest Expense .................................................................... 21,840
Premium on Bonds Payable ($42,120 × 6/117) .................... 2,160
Cash ........................................................................... 24,000
Bonds Payable ....................................................................... 300,000
Premium on Bonds Payable* ................................................ 19,440
Gain on Redemption of Bonds .................................. 13,440
Cash ........................................................................... 306,000
*1/2 × ($42,120 - $1,080 - $2,160) = $19,440.