Question

The Gorman Group issued $890,000 of 9% bonds on June 30, 2021, for $978,079. The bonds were dated on June 30 and mature on June 30, 2041 (20 years). The market yield for bonds of similar risk and maturity is 8%. Interest is paid semiannually on December 31 and June 30.

Required:
Complete the below table to record the company's journal entry.
1. to 3. Prepare the journal entries to record their issuance by The Gorman Group on June 30, 2021, interest on December 31, 2021 and interest on June 30, 2022 (at the effective rate).

Answer 1

In the books of The Gorman Group

1.Journal Entry For Issuance on June 20,2021

Date General Journal Debit Credit

June 20, 2021 Cash $978,079

Bond Payable $890,000

Premium on Bond Payable $88,079

Explanation:

Amount of Cash = Issue Price i.e. $978,079

Amount of Bond Payable = Face Value of Issued Bond i.e. $890,000

Amount of Premium on Bond Payable = Issue Price - Face Value i.e. {$978,079 - $890,000} $88,079

2.Journal Entry For Payment of Interest on December 31, 2021 and June 30, 2022.

Date    General Journal Debit Credit

December 31, 2021 Interest Expense $39,123

Premium on bonds payable $927

Cash $40,050

June 30, 2022 Interest Expense $39,086

Premium on bonds payable $964   

Cash $40,050

Explanation:

Amount of interest = Rate of Srcurity with Similar * Net Issue Price

Cash actually Paid = Acual Rate * Face Value

Premium on bond (Amortization amount) = Amount of interest - Cash

For December 31, 2021

Amount of interest = 4% * $978,079 = $39,123

Cash actually Paid = 4.5% * $890,000 = $40,050

Premium on bond (Amortization amount) = $927

For June 30, 2022

Amount of interest = 4% * {$978,079 - 927} = $39,086

Cash actually Paid = 4.5% * $890,000 = $40,050

Premium on bond (Amortization amount) = $964