Question

Bond Payable:

On 7/1/14, Sasha issued $ 2,000,000 12% bonds, maturing in 5 years with a yield of 10%,

compounded semi-annually. The bonds pay interest semi-annually on June 30 and December 31

of each year. The bonds are to be accounted for under the effective interest method. Round to

the nearest dollar.

At what amount were the bonds issued? __________

a. Prepare a well-labeled schedule (with debits/credits shown) for the journal entries through the life of the Bond.

b. Prepare the original Journal Entry to record the issue of the Bond

c. Prepare the Journal Entry to record the 12/31/15 Interest related to the Bond

Answer 1

Semiannual interest: 2000000*.12 *6/12 = 120000

semiannual months= 5*2 =10

semiannual yield = 10*6/12 = 5%

1)Issue price =[PVA 5%,10*Interest ]+[PVF 5%,10*Face value]

          =[7.72173*120000]+ [.61391*2000000]

           = 926607.6+ 1227820

           = $ 2,154,428

2)

Date	Account Title and explanation	Debit	credit

b)

Date	Account title and explanation	Debit	credit
7/1/14	Cash	2,154,428
	Premium on bond payable		154,428
	Bond payable		2,000,000
	[Being bond issued at premium]
12/31/15	Interest expense	106463
	Premium on bond payable	13537
	cash		120000
	[being semiannual interest paid]

***

Date	Interest paid	Interest expense	premium amortised	carrying value at end
7/1/14				2,154,428
12/31/14	120000	107721 [2154428*.05]	12279	2142149   [2154428-12279]
6/30/15	120000	107107   [2142149*.05]	12893	2129256   [2142149-12893]
12/31/15	120000	106463	13537