Question

6/30/y1, $5,000,000 face value bonds, with an 8%

coupon rate, are issued to yield 5%. These are 20-

year bonds, and they pay interest on June 30 and

December 31. These bonds were issued for $6,882,706.

Please record the following, using the effective interest

approach:

6/30/y1 issuance of the bonds.

12/31/y1 payment of interest.

6/30/y2 payment of interest.

12/31/y2 payment of interest.

Answer 1

Solution:

Bond Amortization Schedule
Date	Cash Paid	Interest Expense	Premium Amortized	Unamortized Premium	Carrying Value
6/30/Y1				$1,882,706	$6,882,706
12/31/Y1	$200,000	$172,068	$27,932	$1,854,774	$6,854,774
6/30/Y2	$200,000	$171,369	$28,631	$1,826,143	$6,826,143
12/31/Y2	$200,000	$170,654	$29,346	$1,796,797	$6,796,797

Journal Entries
Date	Particulars	Debit	Credit
6/30/Y1	Cash Dr	$6,882,706.00
	To Bond Payable		$5,000,000.00
	To Premium on Bond Payable		$1,882,706.00
	(To record issue of bond at premium)
12/31/Y1	Interest expense Dr	$172,068.00
	Premium on bond payable Dr	$27,932.00
	To Cash		$200,000.00
	(To record interest payment and premium amortization)
6/30/Y2	Interest expense Dr	$171,369.00
	Premium on bond payable Dr	$28,631.00
	To Cash		$200,000.00
	(To record interest payment and premium amortization)
12/31/Y2	Interest expense Dr	$170,654.00
	Premium on bond payable Dr	$29,346.00
	To Cash		$200,000.00
	(To record interest payment and premium amortization)