Question

On June 30, 2020, Mischa Auer Company issued $4,000,000 face value of 13%, 20-year bonds at $4,300,918, a yield of 12%. Auer uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and December 31.

Prepare the journal entries to record the following transactions. (Round answer 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, 2020.
(2)		The payment of interest and the amortization of the premium on December 31, 2020.
(3)		The payment of interest and the amortization of the premium on June 30, 2021.
(4)		The payment of interest and the amortization of the premium on December 31, 2021

Answer 1

		4,000,000
		(A)	(b)	c=a-b	d=CV -c
		6.50%	6%
	Date	Cash	interest	premium	Carrying
			expense	amortized	value
	6/30/2020				4,300,918
	12/31/2020	260000	258055	1945	4,298,973
	6/30/2021	260000	257938	2062	4,296,911
	12/31/2021	260000	257815	2185	4,294,726
a)
1)	Journal Entries
	Date	Account titles & Explanations				Debit	Credit
	6/30/2020	Cash				4,300,918
		premium on bonds payable					300,918
		Bonds payable					4,000,000
2)	12/31/2020	interest expense				258055
		premium on bonds payable				1945
		cash					260000
3)	6/30/2021	interest expense				257938
		premium on bonds payable				2062
		cash					260000
4)	12/31/2021	interest expense				257815
		premium on bonds payable				2185
		cash					260000
b)		Balance Sheet (Partial )
		As on December 31,2021
	Long term liabilities
	Bonds payable			4,000,000
	Add:premium on bonds			294,726
	bonds payable net			4,294,726