*A company issued 14%, 5-year bonds with a par value of $5,000,000 on January 1,
ID: 2504927 • Letter: #
Question
*A company issued 14%, 5-year bonds with a par value of $5,000,000 on January 1, 2003. Interest is to be paid seminannually on June 30 an December 31. The bonds are issued for $5,368,035 cash when the market interest rate for this bond was 12%.
*The company uses the effective interest method of amortization of any discount or premium on bonds.
**Prepare the journal entries
(a) to record the issuance of this company's bonds
(b) the first semiannual interest payment of June 30, and
(c) the second semiannual interest payment on December 31
Explanation / Answer
A) Prepare the general journal entry to record the issuance of the bonds on January 1
Dr Cash $5,368,035
Cr Bonds premium $368,035
Cr Bonds payable $5,000,000
B) Show how the bonds would be reported on Walker's balance sheet at January 1
Long-term liabilities
Bonds payable $5,000,000
Bonds premium $368,035
Carrying value $5,368,035
C) Walker uses the straight line method of amortization of any discount or premium on bonds. Prepare the general journal entry to record the first semiannual interest payment on June 30.
These are 5 yr bonds with interest paid semiannually, so there are 10 interest periods. The bond premium is amortised on the straight line method over these 10 periods. Each period $368,035/10 = 36,803.50 is amortised.
June 30
Dr Bond interest expense 313,196.50
Dr Bond premium 36,803.50
Cr Cash 350,000 (half of $5m x 14%)
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