Step 9
Step 9
Here we will record the transactions relating to SpringTime’s bond, the amortization of the bond premium and the interest earned. Half of the interest will be used for future Spring Fling expenses and the other half will be added to the endowment.
SpringTime purchased a bond for 10200 with a par value of 10000. The premium on the bond was 200. Let us set up a separate account for the premium, reducing what was previously recorded as a "bond," as we will need to keep track of this premium.
| dr | cr | |
|---|---|---|
| Bond | 200 | |
| Premium on bond | 200 |
The bond was purchased on June 30, 2000 and matures on June 30, 2010. Therefore we will need to amortize the premium over ten years. We will amortize the premium into interest income on a straight line basis. We need to amortize the entire premium against the interest allocated to the Spring Fling program in order to maintain the original amount of the endowment. In the end the Endowment fund will receive $200 more interest than the Spring Fling program and the endowment balance will be recovered.
The amortization of the premium for the year 2000 amounts to $10. (200/10 years/0.5 years)
We can record the following entry:
| dr | cr | |
|---|---|---|
| Premium on bond | 10 | |
| Deferred contributions -SF | 10 |
We can also accrue six months of the interest we will receive, adjusting the receivables for the premium amortization above:
(10000 X 5%) X 1/2 year = $250
| dr | cr | |
|---|---|---|
| Accounts receivable, E-Fund | 135 | |
| Account receivable | 115 | |
| Interest income | 125 | |
| Endowment revenue | 125 |