Question

On January 2, 2019 Shane Creamer issued a $2,000,000 bond that matures in 5 years and pays 10% interest (stated or coupon rate) a year. (Payment date is December 31.) The market (yield) rate is 6%. a. Record the entry Shane has to make on January 2 when he issues the Bonds Payable B. Interest Expense Year Ending C. Interest Exp. Year Ending

Answer 1

Shane Creamer
Sr.No.	Answer
1	Bonds have coupan rate of 10%, when the market is paying 6% coupan, as the bond pays higher coupan it must be sold at a premium. Calculation of selling price of bond = 2000000*10%/6% = 3333333.33
2	Journal Entry on Issuance of Bond:
Date	Account Titles	Debit	Credit
02.01.2019	Bank A/c	3,333,333.33
	10% Bonds Payable		2,000,000.00
	Premium on issuance of bond		1,333,333.33
	To record issue of bonds at premium
31.12.2019	Interest Expenses	200,000.00
	Bank A/c		200,000.00
	To record Interest payment for the year ended 31.12.2019
31.12.2020	Interest Expenses	200,000.00
	Bank A/c		200,000.00
	To record Interest payment for the year ended 31.12.2020