Question

On January 1 of this year, Victor Corporation sold bonds with a face value of $1,580,000 and a coupon rate of 8 percent. The bonds mature in four years and pay interest semiannually every June 30 and December 31. Victor uses the straight-line amortization method and also uses a premium account. Assume an annual market rate of interest of 6 percent. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your final answer to whole dollars.) Required: 1. Prepare the journal entry to record the issuance of the bonds. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) View transaction list Journal entry worksheet Record the issuance of the bonds. Note: Enter debits before credits. Date Debit Credit January 01 General Journal General Journal Cash Premium on bonds payable Bonds payable 1,580,000

Please post step-by-step computations, thank you!

Answer 1

1. Calculation of semi-annual interest = Face value of bond * Coupon rate * 1/2 = $1,580,000 * 8% *1/2 = $63,200.

2. To calculate premium on bond, we will have to find present value of bond and interest payable to bond holders and the interest rate to be used for the purpose of discounting them will be market rate of interest which is 6%.

3. Cash flows will include interest payment semi-annually till 4 years and at the end of 4th year, face value of bond will also be repaid.

4. Total period = No. of years * 2 = 4 * 2 = 8 periods.

5. Rate of interest to be used for discounting = 6% / 2 = 3% (as interest is paid semi-annually, therefore, cash flows will be discounted used semi-annual interest rate).

Period	Cash flows		Present value factor @ 3%	Present value of cash flows
	Interest	Principal
1	$63,200	0	0.9709	$61,361
2	$63,200	0	0.9426	$59,572
3	$63,200	0	0.9151	$57,834
4	$63,200	0	0.8884	$56,147
5	$63,200	0	0.8625	$54,510
6	$63,200	0	0.8374	$52,924
7	$63,200	0	0.813	$51,382
8	$63,200	$1,580,000	0.7893	$1,296,978
Present value of cash flows				$1,690,708

As the present value of cash flows are more than the face value, therefore, the bonds are said to be issued at premium.

Bond Premium = Present value of cash flows - Face value = $1,690,708 - $1,580,000 = $110,708

Date	General Journal	Debit	Credit
January 1	Cash	$1,690,708
	Premium on Bonds payable		$110,708
	Bonds Payable		$1,580,000