Question

Mitchell Inc. issued 60, 6%, $1,000 bonds on January 1, 2020. The bonds pay cash interest annually each December 31 and were issued to yield 5%. The bonds mature December 31, 2024, and the company uses the effective interest method to amortize bond discounts or premiums.

Required

a. Determine the selling price of the bonds. Round amount to the nearest whole dollar.

b. Prepare an amortization schedule for the full bond term.

c. Prepare journal entries on the following dates.

1. January 1, 2020, bond issuance.

2. December 31, 2020, interest payment.

3. December 31, 2021, interest payment.

Answer 1

	Bond characterstics				Amount
1-a)	Principal				60,000
	interest				3,600
	Market interest rate				5%
	periods to maturity				5
	issue price				62,598
	Calculation of bond issue price
	Where
	i=	5.00%
	t=	5
	principal		*	PV of $1 at 6% for 30 yrs =
	60,000		*	0.78353		=	47012
	interest		*	PV of ordinary annuity at 6%=
	3600		*	4.32948		=	15586
	bond issue price						62598

	Cash	interest	premium	Carrying
Date	paid	expense	amortized	value
1/1/2020				62,598
12/31/2020	3,600	3130	470	62,128
12/31/2021	3,600	3106	494	61,634
Date	Account titles & Explanations				Debit	Credit
1/1/2020	Cash				62,598
	premium on bonds					2,598
	bonds payable					60,000
12/31/2020	interest expense				3130
	premium on bonds payable				470
	cash					3,600
12/31/2021	interest expense				3106
	premium on bonds payable				494
	cash					3600