Question

Cornerstone Exercise 9-38
Bonds Issued at a Premium (Effective Interest)

Charger Battery issued $200,000 of 11%, 7-year bonds on January 1, 2020, for $220,132. Interest is paid annually on December 31. The market rate of interest is 9%.

Required:

Prepare the journal entries for December 31, 2021 and 2022. If required, round your answers to the nearest whole dollar.

(Show your work)

Answer 1

• Before Preparing Journal Entries, we must first prepare an amortisations schedule for Interest expense and Premium on Bonds payable.
• Amortisation Schedule

Date	Cash Interest paid	Interest Expense	Premium Amortised	Unamortised Premium	Carrying Value of Bond
	[A = 200000 x 11%]	[B = Previous 'E' x 9%]	[C = A - B]	[D = D - C]	[E = E - C]
01-Jan-20				$                 20,132	$              220,132
31-Dec-20	$                                      22,000	$                  19,812	$                   2,188	$                 17,944	$              217,944
31-Dec-21	$                                      22,000	$                  19,615	$                   2,385	$                 15,559	$              215,559
31-Dec-20	$                                      22,000	$                  19,400	$                   2,600	$                 12,959	$              212,959

• Journal Entries asked, based on above

Date	Accounts title	Debit	Credit
31-Dec-21	Interest Expense [Column B]	$                  19,615
	Premium on Bonds Payable [Column C'	$                    2,385
	Cash [Column A]		$                 22,000
	(Annual Interest paid)
31-Dec-20	Interest Expense [Column B]	$                  19,400
	Premium on Bonds Payable [Column C'	$                    2,600
	Cash [Column A]		$                 22,000
	(Annual Interest paid)