Question

McGee Company issued $400,000 of 8%, 10-year bonds on January 1, 2017. Interest is payable semiannually on July 1 and January 1. Mcgee Company uses the effective interest method of amortization for bond premium or discount. Assume an effective yield of 6% in Pricing the bond.

Prepare the journal entries to record the following (round to the nearest dollar.)

The issuance of the bonds.

The payment of interest and related amortization July 1.

The accrual of interest and the related amortization on December 31

Answer 1

Solution :

Computation of bond price
Table values are based on:
n=	20
i=	3%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.55368	$400,000	$221,470
Interest (Annuity)	14.87747	$16,000	$238,040
Price of bonds			$459,510

Journal Entries
Date	Particulars	Debit	Credit
1-Jan-17	Cash Dr	$459,510.00
	To Bond Payable		$400,000.00
	To Premium on Bond Payable		$59,510.00
	(To record issue of bond)
1-Jul-17	Interest expense Dr ($459,510*3%)	$13,785.00
	Premium on bond Payable Dr	$2,215.00
	To Cash ($400,000*4%)		$16,000.00
	(To record interest payment and premium amortization)
31-Dec-17	Interest expense Dr [(459,510 - $2,215)*3%]	$13,719.00
	Premium on bond Payable Dr	$2,281.00
	To Interest Payable		$16,000.00
	(To record interest accrued and premium amortization)