Question

E10-22 (Algo) Recording and Reporting a Bond Issued at a Premium (Straight-Line Amortization with Premium Account) LO10-5

On January 1 of this year, Victor Corporation sold bonds with a face value of $1,470,000 and a coupon rate of 9 percent. The bonds mature in four years and pay interest semiannually every June 30 and December 31. Victor uses the straight-line amortization method and also uses a premium account. Assume an annual market rate of interest of 8 percent. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your final answers to whole dollars.)

Required:

1.&2. Prepare the journal entry to record the issuance of the bonds and the interest payment on June 30 of this year.

3. What bonds payable amount will Victor report on its June 30 balance sheet?

Prepare the journal entry to record the issuance of the bonds and interest payment on June 30 of this year. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Journal entry worksheet

• Record the issuance of the bonds.

Note: Enter debits before credits.

	Date General Journal Debit Credit January 01

• Record the interest payment on June 30, using straight-line amortization.

Note: Enter debits before credits.

	Date General Journal Debit Credit June 30

Answer 1

Answer to Requirement 1 & 2.

Face Value of Bonds = $1,470,000

Annual Coupon Rate = 9.00%
Semiannual Coupon Rate = 4.50%
Semiannual Coupon = 4.50% * $1,470,000
Semiannual Coupon = $66,150

Time to Maturity = 4 years
Semiannual Period = 8

Annual Interest Rate = 8.00%
Semiannual Interest Rate = 4.00%

Issue Price of Bonds = $66,150 * PVA of $1 (4.00%, 8) + $1,470,000 * PV of $1 (4.00%, 8)
Issue Price of Bonds = $66,150 * 6.73274 + $1,470,000 * 0.73069
Issue Price of Bonds = $1,519,485

Premium on Bonds Payable = Issue Price – Face Value
Premium on Bonds Payable = $1,519,485 - $1,470,000
Premium on Bonds Payable = $49,485

Semi-annual Premium Amortization = $49,485 / 8
Semi-annual Premium Amortization = $6,186

Answer to Requirement 3.
Bonds Payable to be reported in June 30 = Issue Price – Premium amortized
Bonds Payable to be reported in June 30 = $1,519,485 - $6,186
Bonds Payable to be reported in June 30 = $1,513,299