The Windy City Company issued $500,000 of 12% bonds on January 1, 2016. The bond

Question

The Windy City Company issued $500,000 of 12% bonds on January 1, 2016. The bonds were sold for $549,493, and they were expected to yield 10% interest compounded semiannually. The interest dates are June 30 and December 31. The maturity date of the bonds is December 31, 2022.

Required:

a.

Prepare the journal entry to record the issuance of the bonds.

b.

Using the effective interest method, prepare the journal entries to record the first two interest payments.

a.

Prepare the journal entry to record the issuance of the bonds.

b.

Using the effective interest method, prepare the journal entries to record the first two interest payments.

Explanation / Answer

Effective interest method 12% 10% Year Cash paid Interest expense Premium amortized Premium on bonds Carrying amount 49493 549493 30-06-2016 30000 27475 2525 46968 546968 31-12-2016 30000 27348 2652 44316 544316 01-01-2017 Cash 549493            Premium on bonds payable 49493            Bonds payable 500000 31-12-2017 Interest expense 27475 Premium on bonds payable 2525                  Cash 30000 31-12-2019 Interest expense 27348 Premium on bonds payable 2652                  Cash 30000

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