Question

May 1, 2017 Sold $300,000 10-year 10% bond at a yield of 8%. Interest is paid semiannually on January 1 and July 1. Make necessary entries for the sale of the bond as well as the interest payments for the years 2017 through 2019. Use effective interest method of amortization.

Answer 1

Present value of the bond = Semiannual coupon x PVA _{4%, n = 20} + Par Value x PV _{4%, n= 20} = $ 300,000 x 10% x 1/2 x 13.5903 + $ 300,000 x 0.4564 = $ 203,854.50 + $ 136,920 = $ 340,774.50

In the book of....

Date	Account Titles	Debit	Credit
		$	$
May 1, 2017	Cash	340,775
	Bonds Payable		300,000
	Premium on Bonds Payable		40,775
July 1, 2017	Interest Expense ( 340,775 x 4 % ) / 6 x 2	4,544
	Premium on Bonds Payable	456
	Cash		5,000
December 31, 2017	Interest Expense	13,613
	Premium on Bonds Payable	1,387
	Interest Payable		15,000
January 1, 2018	Interest Payable	15,000
	Cash		15,000
July 1, 2018	Interest Expense	13,557
	Premium on Bonds Payable	1,443
	Cash		15,000
December 31, 2018	Interest Expense	13,500
	Premium on Bonds Payable	1,500
	Interest Payable		15,000
January 1, 2019	Interest Payable	15,000
	Cash		15,000
July 1, 2019	Interest Expense	13,440
	Premium on Bonds Payable	1,560
	Cash		15,000
December 31, 2019	Interest Expense	13,377
	Premium on Bonds Payable	1,623
	Interest Payable		15,000