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In: Accounting

On January 1, 2019 Lightfoot Corporation issues 10%, 5-year bonds with a face value of $275,000...

On January 1, 2019 Lightfoot Corporation issues 10%, 5-year bonds with a face value of $275,000 when the effective interest rate is 9%. Interest is to be paid semiannually on June 30 and December 31. Lightfoot uses the effective interest method to amortize the premium on June 30, 2019.

Prepare the journal entry to record the first interest payment on June 30, 2019.

Solutions

Expert Solution

Semi Annual interest payment = 275,000 x 10% x 6/12
= $13,750

Present value of principal to be received at the maturity = Par value of bonds x Present value factor (r%, n)

= 275,000 x Present value factor (4.5%, 10)

= 275,000 x 0.64393

= $177,080.75

Present value of interest to be received periodically over the term of the bonds = Interest x Present value annuity factor (r%, n)

= 13,750 x Present value annuity factor (4.5%, 10)

= 13,750 x 7.91272

= $108,799.90

Selling price of bond = Present value of principal to be received at the maturity + Present value of interest to be received periodically over the term of the bonds

= 177,080.75+108,799.9
= $285,881

Date General Journal Debit Credit
June 30, 2019 Interest expense $12,865
Premium on bonds payable $885
Cash $13,750

Effective interest rate = 9%

Interest expense to be recorded on June 30, 2019 = Carrying value of bonds x Effective interest rate x 6/12

= 285,881 x 9% x 6/12

= $12,865

Premium on bonds payable to be amortized on June 30, 2019 = Semi annual interest payment - Interest expense to be recorded on June 30, 2019

= 13,750-12,865

= $885

Note: Exact answer may slightly differ due to rounding off and factor value considered

Kindly comment if you need further assistance.

Thanks‼!

ekkarill92 answered 1 year ago
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