Question

On January 1, 2018, Splash City issues $500,000 of 9% bonds, due in 20 years, with interest payable semiannually on June 30 and December 31 each year.

Required:

Assuming the market interest rate on the issue date is 8%, the bonds will issue at $549,482.

1. Complete the first three rows of an amortization table.

2. Record the bond issue on January 1, 2018, and the first two semiannual interest payments on June 30, 2018, and December 31, 2018.

Answer 1

SOLUTION

(1) Amortization table-

Date	Cash Paid($)	Interest expense ($)	Increase in carrying value ($)	Carrying value ($)
1/1/18				549,482
6/30/18	22,500	21,979	521	548,961
12/31/18	22,500	21,958	542	548,419

Explanation -

Cash paid = Face amount * 4.5% Stated rate

Interest expense = Carrying value * 4% Market rate

Decrease in carrying value = Cash paid - Interest expense

Carrying value = Prior carrying value - Decrease in carrying value

(2) Journal entries-

Date	Account titlles and Explanation	Debit ($)	Credit ($)
January 1, 2018	Cash	549,482
	Premium on bonds payable		49,482
	Bonds payable		500,000
	(To record issuance of bonds)
June 30, 2018	Interest Expense	21,979
	Premium on bonds payable	521
	Cash		22,500
	(To record first semiannual interest payments)
December 31, 2018	Interest Expense	21,958
	Premium on bonds payable	542
	Cash		22,500
	(To record second semiannual interest payments)