Question

On January 1, Montgomery Inc. issued $200,000 of 12% 5-year bonds when the market interest
rate was 10%. The bonds pay interest semiannually on June 30th and December 31. Proceeds
received were $215,443.
These bonds were issued at a DISCOUNT/PREMIUM (circle one) because the Contract Rate is
EQUAL TO/ GREATER THAN/ LESS THAN (circle one) the Market Rate
Record the following transactions:
Bond issue on January 1
Paid semiannual interest on June 30
Amortized the bond premium or discount

Answer 1

These bonds were issued at a DISCOUNT/PREMIUM because the Contract Rate is EQUALTO / GREATER THAN / LESS THAN the Market Rate.  

1. Issue of bonds
date	Account Title	Debit	Credit
Jan.1	Cash	215443
	Bonds Payable		200000
	Premium on bonds payable		15443

Entry for payment of interest na damortization of bond premium
Date	Account Title	Debit	Credit
June.30	Interest Expense	10772
	Premium on bond payable	1228
	Cash		12000

Working:

Bond premium amortization schedule
Date	Cash	Interest	Premium	Premium	Face value	Book value
	paid	expense	Amortized	Balance	of the bond	of the bond
Jan.1 ,Year 1				15443	200000	215443
June.30, Year 1	12000	10772	1228	14215	200000	214215
Dec.31, Year 1	12000	10711	1289	12926	200000	212926
June.30, Year 2	12000	10646	1354	11572	200000	211572
Dec.31, Year 2	12000	10579	1421	10151	200000	210151
June.30, Year 3	12000	10508	1492	8658	200000	208658
Dec.31, Year 3	12000	10433	1567	7091	200000	207091
June.30, Year 4	12000	10355	1645	5446	200000	205446
Dec.31, Year 4	12000	10272	1728	3718	200000	203718
June.30, Year 5	12000	10186	1814	1904	200000	201904
Dec.31, Year 5	12000	10095	1904	0	200000	200000

Interest expense is recorded at the market rate on the book value of the bonds.

Cash is paid on the face value of the bonds at the contract rate.

The difference between the two is the amount of premium amortized.