On January 1, Year 1, a company issues $320,000 of 8% bonds, due in 15 years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 7%, the bonds will issue at $349,428.

Required:

Record the bond issue on January 1, Year 1, and the first two semiannual interest payments on June 30, Year 1, and December 31, Year 1.

Answer with its Explanation:

At the issuance date, the bond the double entry would be as under:

Dr Cash $349,428

Cr Bonds payable $320,000

Cr Premium on Bonds payable $29,428

At June 30,2021, semi annual interest payment date, the double entry would be:

Dr Interest expense $12,230 ($349,428 * 7% * 6/12)

Dr Premium on Bonds payable $570

Cr Cash $12,800 (320,000 * 8% * 6/12)

Now at the end of the first six months, the carrying value of the bond would decrease by $570 ($349,428*8% * 6/12 - $320,000*7% * 6/12) to $348,858.

Now at December 31,2021, the next semi annual interest payment date, the double entry on this date would be:

Dr Interest expense $12,210 ($348,858 * 7% * 6/12)

Dr Premium on Bonds payable $590

Cr Cash $12,800 ($320,000 * 8% * 6/12)

Now at the end of the first six months, the carrying value of the bond would decrease by $590 ($348,858*8% * 6/12 - $320,000*7% * 6/12) to $348,268.