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30 November, 13:33

On January 1, 2021, a company issues $800,000 of 8% bonds, due in ten years, with interest payable semi annually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 7%, the bonds will issue at $856,850.

Required:

1. Fill in the blanks in the amortization schedule below: (Round your answers to the nearest dollar amount. Enter all amounts as positive values.)

Interest Change in Carrying Value Carrying Value

Date Cash Paid Expense

01/01/2021

06/30/2021

12/31/2021

2. Record the bond issue on January 1, 2021, and the first two semi-annual interest payments on June 30, 2021, and December 31, 2021. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field. Round your answers to the nearest dollar amount.)

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Answers (1)
  1. 30 November, 14:45
    0
    Date Interest Interest Amortization Bond's

    payment expense bond premium book value

    Jan. 1, 2021 856,850

    June 30, 2021 32,000 29,157.50 2,842.50 854,007.50

    Dec. 31, 2021 32,000 29,157.50 2,842.50 851,165

    Assuming you are using a straight line amortization of bond premium, then the amortization per coupon payment = $56,850 / 20 = $2,842.50

    January 1, 2021, bonds are issued

    Dr Cash 856,850

    Cr Bonds payable 800,000

    Cr Premium on bonds payable 56,850

    June 30, 2021, first coupon payment

    Dr Interest expense 29,157.50

    Dr Premium on bonds payable 2,842.50

    Cr Cash 32,000

    December 31, 2021, second coupon payment

    Dr Interest expense 29,157.50

    Dr Premium on bonds payable 2,842.50

    Cr Cash 32,000

    If the company uses the effective interest method, the numbers vary a little:

    amortization of bond premium on first coupon payment:

    ($856,850 x 3.5%) - ($800,000 x 4%) = $29,989.75 - $32,000 = - $2,010.25 ≈ - $2,010

    Journal entry to record first coupon payment:

    Dr Interest expense 29,990

    Dr Premium on bonds payable 2,010

    Cr Cash 32,000

    amortization of bond premium on second coupon payment:

    ($854,840 x 3.5%) - ($800,000 x 4%) = $29,919.40 - $32,000 = - $2,080.60 ≈ - $2,081

    Journal entry to record second coupon payment:

    Dr Interest expense 29,919

    Dr Premium on bonds payable 2,081

    Cr Cash 32,000
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