Question

On 1-1-2015 Avion, Inc. Sold Bonds with these particulars:

Face amt. of Bonds 475,000

Matures on 1-1-2015, in 10 yrs.

Stated annual rate of int. 8.75%

Effective annual rate of interest 8.00%

Int. is paid every six months; 6-30, 12-31

Req. 1, Assume the effective Interest Method in accounting for these Bonds, build a 10 year amortization table

Req. 2, Give General Journal entries to record the sale of the bonds, and the 1st 4 interest payments

Please show calculations

Answer 1

Market price
= $20781 x PVIFA (4%, 20) + 475000 x PVIF(4%, 20)
= $20781 x 13.59 + 475000 x 0.4564
= $499204
Premium = $499204 - $475000 = $24204
semi annual period	cash payment (credit) @ 4.375%	Interest expense (debit) @4%	premium on bonds payable (debit)	Premium on bonds payable Balance	carrying value
				24204	499204
1	20,781	19,968	813	23,391	498,391
2	20,781	19,936	845	22,546	497,546
3	20,781	19,902	879	21,667	496,667
4	20,781	19,867	914	20,752	495,752
5	20,781	19,830	951	19,801	494,801
6	20,781	19,792	989	18,812	493,812
7	20,781	19,752	1,029	17,784	492,784
8	20,781	19,711	1,070	16,714	491,714
9	20,781	19,669	1,112	15,602	490,602
10	20,781	19,624	1,157	14,445	489,445
11	20,781	19,578	1,203	13,242	488,242
12	20,781	19,530	1,251	11,990	486,990
13	20,781	19,480	1,301	10,689	485,689
14	20,781	19,428	1,353	9,336	484,336
15	20,781	19,373	1,408	7,928	482,928
16	20,781	19,317	1,464	6,464	481,464
17	20,781	19,259	1,522	4,942	479,942
18	20,781	19,198	1,583	3,358	478,358
19	20,781	19,134	1,647	1,712	476,712
20	20,781	19,068	1,713	(1)	474,999

Particulars	Debit($)	Credit($)
YEAR 1
Cash A/c	499204
To Premium on bonds payable A/c		24204
To Bonds payable A/c		475000
Being bonds issued
Interest Expense A/c	19968
Premium on bonds payable A/c	813
To Cash A/c		20781
Being interest expense recorded
YEAR 2
Interest Expense A/c	19936
Premium on bonds payable A/c	845
To Cash A/c		20781
Being interest expense recorded
YEAR 3
Interest Expense A/c	19902
Premium on bonds payable A/c	879
To Cash A/c		20781
Being interest expense recorded
YEAR 4
Interest Expense A/c	19867
Premium on bonds payable A/c	914
To Cash A/c		20781
Being interest expense recorded