Question

On December 31, 2018, when the market interest rate is 12%, Willis Realty issues $400,000 of 13.25%, 10-year bonds payable. The bonds pay interest semiannually. Willis Realty received $428,755 in cash at issuance. Requirements 1. Prepare an amortization table using the effective interest amortization method for the first two semiannual interest periods. (Round to the nearest dollar.) 2. Using the amortization table prepared in Requirement 1, journalize issuance of the bonds and the first two interest payments. Requirement 1. Prepare an amortization table using the effective interest amortization method for the first two semiannual interest periods. (Round to the nearest dollar.) Interest Carrying Cash Paid Expense Amortized Amount 12/31/2018 06/30/2019 12/31/2019

Answer 1

Face Value of Bonds = $400,000
Issue Value of Bonds = $428,755

Premium on Bonds = Issue Value of Bonds - Face Value of Bonds
Premium on Bonds = $428,755 - $400,000
Premium on Bonds = $28,755

Annual Coupon Rate = 13.25%
Semiannual Coupon Rate = 6.625%
Semiannual Coupon = 6.625% * $400,000
Semiannual Coupon = $26,500

Time to Maturity = 10 years
Semiannual Period = 20

Answer to Requirement 1:

Cash Paid 12/31/2018 06/30/2019 12/31/2019 Interest Premium Expense Amortized $ 25,725 $ 775 $ 25,679 $ 821 $ Carrying Amount 428,755 427,980 427,159 $ $ 26,500 $ 26,500 $

Answer to Requirement 2:

Credit Debit 428,755 $ 400,000 28,755 Date Accounts and Explanation 12/31/2018 Cash Bonds Payable Premium on Bonds Payable 06/30/2019 Interest Expense Premium on Bonds Payable Cash 12/31/2019 Interest Expense Premium on Bonds Payable Cash $ $ 25,725 775 $ 26,500 25,679 821 $ 26,500