Question

Using the effective-interest amortization method

On December 31, 2018, when the market interest rate is 6%, Benson Realty issues $700,000 of 6.25%, 10-year bonds payable. The bonds pay interest semiannually. Ben- son Realty received $713,234 in cash at issuance.

Requirements

1. Prepare an amortization table using the effective interest amortization method for the first two semiannual interest periods. (Round to the nearest dollar.)

2. Using the amortization table prepared in Requirement 1, journalize issuance of the bonds and the first two interest payments.

Answer 1

1.

A	B	C	D = B - C	E	F	G = E + F
Date	Interest Payment (Stated Rate 3.125%)	Interest Expense (Effective Rate 3%)	Amortization	Credit Balance in Bond Premium	Credit Balance in Bonds Payable	Book value of Bonds
Dec. 31, 2018				13234	700000	713234
Jun. 30, 2019	21875	21397	478	12756	700000	712756
Dec. 31, 2019	21875	21383	492	12264	700000	712264

Stated interest rate = 6.25%/2 = 3.125%

Effective interest rate = Market interest rate = 6%/2 = 3%

2.

Date	Account Titles and Explanation	Debit	Credit
Dec. 31, 2018	Cash	713234
	Bonds payable		700000
	Premium on bonds payable		13234
	(To record issuance of bonds at premium)
Jun. 30, 2019	Interest expense	21397
	Premium on bonds payable	478
	Cash		21875
	(To record interest payment and amortization of premium)
Dec. 31, 2019	Interest expense	21383
	Premium on bonds payable	492
	Cash		21875
	(To record interest payment and amortization of premium)