Question

On February 1, 2018, Wolf Inc. issued 10% bonds dated February 1, 2018, with a face amount of $200,000. The bonds will mature in 10 years. The effective interest rate for these bonds was 8%. Interest is paid semiannually on July 31 and January 31. Wolf's fiscal year is the calendar year. Wolf uses the effective interest method of amortization.

Required:

Prepare the bond entry to record interest on July 31, 2018.

I was just told this question needs updated. I disagree, its nothing too hard. Please try again.

Answer 1

Date	Account Titles and Explanation	Debit	Credit
July 31, 2018	Interest Expense (227181*8%*6/12)	$9,087.24
	Premium on Bond Payable	$912.76
	Cash (200000*10%*6/12)		$10,000

Working Note:

Interest rate = 10% p.a. , 5% semiannual

Market rate = 8%, 4% semiannual

Nos of semiannual periods upto maturity = 10 years * 2 = 20 periods

Computation of bond price
Table values are based on:
n=	20
i=	4.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.45639	$200,000.00	$91,278
Interest (Annuity)	13.59033	$10,000.00	$135,903
Price of bonds			$227,181