Question

Required information [The following information applies to the questions displayed below.] On January 1, 2021, White Water issues $530,000 of 6% bonds, due in 20 years, with interest payable semiannually on June 30 and December 31 each year. The market interest rate on the issue date is 5% and the bonds issued at $596,522 Required: 1. Using an amortization schedule, show that the bonds have a carrying value of $590,217 on December 31, 2023. (Round your interest expense to the nearest whole dollar.) Interest Decrease in Carrying Value Date Cash Paid Expense Carrying Value 01/01/2021 06/30/2021 12/31/2021 06/30/2022 12/31/2022 06/30/2023 12/31/2023

Answer 1

The effective interest rate is also called as market rate. It is the investor's yield maturity. When the effective interest rate is lower as compared bond coupon rate then, the bonds were issued at a premium. The premium is then amortised over the period of bond by using effective interest rate method.

Under this method, interest expense is derived by multiplying the bond carrying value with the effective interest rate applicable when the bonds were issued. The difference between the interest expense and actual interest paid is the premium which will be amortised.

Date Cash Paid [$530000 x 6%/2] Interest Expense Decrease in Carrying Value Carrying Value 01/01/2021 06/30/2021 12/31/2021 06/30/2022 12/31/2022 06/30/2023 12/31/2023 $15,900 $15,900 $15,900 $15,900 $15,900 $15,900 $14,913 $14,888 $14,863 $14,837 $14,811 $14,783 $987 $1,012 $1,037 $1,063 $1,089 $1,117 $5,96,522 $5,95,535 $5,94,523 $5,93,486 $5,92,423 $5,91,334 $5,90,217 Date General Journal Debit Credit Dec 31, 23 Bond Payable $5,30,000 Premium on Bond Payable $60,217 Gain on redemption of bond $1,12,424 Cash $4,77,793 (To record redemption of bond)