2. Capital Company issued $600,000, 10%, 20-year bonds on January 1, 2020, at 103. Interest is...

2. Capital Company issued $600,000, 10%, 20-year bonds on January 1, 2020, at 103. Interest is payable semiannually on July 1 and January 1. The effective interest rate is 8%. Capital uses the straight-line method of amortization and has a calendar year end. Instructions: Prepare all journal entries made in 2020 related to the bond issue.

Expert Solution

Par value of bonds = $600,000

Issue price = 103

Cash received from issue of bonds = Par value of bonds x Issue price

= 600,000 x 103%

= $618,000

Premium on issue of bonds = Cash received from issue of bonds- Par value of bonds

= 618,000-600,000

= $18,000

Semi annual amortization of bonds premium = Bond premium/ Semi annual interest payment periods

= 18,000/40

= $450

Semi annual interest payment = Par value of bonds x Stated interest rate x 6/12

= 600,000 x 10% x 6/12

= $30,000

Date	General Journal	Debit	Credit
January 1, 2020	Cash	$618,000
	Premium on bonds payable		$18,000
	Bonds payable		$600,000
	( To record issuance of bonds)
July 1 , 2020	Interest expense	$29,550
	Premium on bonds payable	$450
	Cash		$30,000
	( To record semi annual interest payment)
December 31, 2022	Interest expense	$29,550
	Premium on bonds payable	$450
	Interest payable		$30,000
	( To record interest expense)

ekkarill92 answered 1 year ago

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