On June 30, 2014, Mischa Auer Company issued $4,002,000 face value of 11%, 20-ye

Question

On June 30, 2014, Mischa Auer Company issued $4,002,000 face value of 11%, 20-year bonds at $4,345,371, a yield of 10%. Auer uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and December 31. (a) Prepare the journal entries to record the following transactions. (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) (1) The issuance of the bonds on June 30, 2014. (2) The payment of interest and the amortization of the premium on December 31, 2014. (3) The payment of interest and the amortization of the premium on June 30, 2015. (4) The payment of interest and the amortization of the premium on December 31, 2015.

Explanation / Answer

a) Journal entries to record the following transactions

30/06/2014

(issue date) cash 4345371 bond payable 4002000

premium on bond payable 343371 31/12/2014

(1st payment) interest exp 217268 premium on bond payable 2842

cash 220110

   ( Dr. exp =NCV*MKT RATE*TIME=(4345371*10%/12*6)

   (cr cash =face value * std rate * time=4002000*11%/12*6)

30/06/2015   

2nd pymt

interest exp 217126 premium on bond payable 2984

cash 220110

   ( Dr. exp =NCV*MKT RATE*TIME=(4345371-2842=4342529*10%/12*6)

   (cr cash =face value * std rate * time=4002000*11%/12*6)

31/12/2015   

3rd pymt

interest exp 216977 premium on bond payable 3132

cash 220110

   ( Dr. exp =NCV*MKT RATE*TIME=(4345371-2842-2984=4339545*10%/12*6)

   (cr cash =face value * std rate * time=4002000*11%/12*6)

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