On April 1, 2016 Alpha Company sells $1,000,000 face value of 10% five year bond

Question

On April 1, 2016 Alpha Company sells $1,000,000 face value of 10% five year bonds which call for semiannual interest payments. The bonds are dated April 1, 2016 so these bonds are issued on an interest date. The market rate at the date of issue is 8%. Use the straight line method of amortization of any bond premium or discount. For simplicity, use a 360-day year and 3 day months for all calculations.

Record the journal entries for the issuance of the bonds

Record the journal entries for the first interest payment due on October 1, 2016. Assume that interest has not been accrued at each month end.

Explanation / Answer

Alpha Company Details Amt $ Bond Face value           1,000,000 Annual Interest on bond @10%               100,000 Market Interets rate is 8% So Issue price =100000/8%=           1,250,000 Premium on Bond=               250,000 Bond Life in Years                           10 Yearly SL amortization =                 25,000 Semi Annual amortization =                 12,500 Semi Annual Interest payable @5%                 50,000 Journal Entries Date Account Title Dr $ Cr $ Apr 1. 2016. Cash             1,250,000 Bond Payable    1,000,000 Premium on Bond          250,000 Oct 1.2016. Interest Payable          50,000 Interest Expense                 37,500 Premium on Bond                   12,500 ( recording Interest expense) Interest Payable                 50,000 Cash          50,000 ( recording interest payment)

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