Question

Recording Bond Entries and Preparing an Amortization Schedule-Effective Interest Method, Premium Mitchell Inc. issued 42, 6%, $1,000 bonds on January 1, 2020. The bonds pay cash interest semiannually each June 30, and 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. June 30, 2020, interest payment. 3. December 31, 2020, interest payment. Bond Selling Price Amortization Schedule Journal Entries Selling price of bonds 0 Check

Answer 1

		P.a.	Per period
	Stated Rate	6%	3.0%
	Market Rate	5%	2.5%
	Face value of bond	42000
		Period	Cashflow	PV	Calculation
		1	1260	$1,229	1260/(1.025)^1
		2	1260	$1,199	1260/(1.025)^2
		3	1260	$1,170	1260/(1.025)^3
		4	1260	$1,141	1260/(1.025)^4
		5	1260	$1,114	1260/(1.025)^5
		6	1260	$1,086	1260/(1.025)^6
		7	1260	$1,060	1260/(1.025)^7
		8	1260	$1,034	1260/(1.025)^8
		9	1260	$1,009	1260/(1.025)^9
		10	43260	$33,795	43260/(1.025)^10
				$43,838
	hence, selling price of bonds = $ 43,838
b	Amortization schedule
	Date	Cash paid	Interest expense	Premium amortized	Closing value
	01-Jan-20				$43,838
	30-Jun-20	1260	$1,096	$164	$43,674
	31-Dec-20	1260	$1,092	$168	$43,506
	30-Jun-21	1260	$1,088	$172	$43,334
	31-Dec-21	1260	$1,083	$177	$43,157
	30-Jun-22	1260	$1,079	$181	$42,976
	31-Dec-22	1260	$1,074	$186	$42,790
	30-Jun-23	1260	$1,070	$190	$42,600
	31-Dec-23	1260	$1,065	$195	$42,405
	30-Jun-24	1260	$1,060	$200	$42,205
	31-Dec-24	1260	$1,055	$205	$42,000
	31-Dec-24	$42,000	0	$0	$0
				$1,838
c	Account titles and explanation		Debit	Credit
01-Jan-20	Cash		$43,838
	Bonds payable			$42,000
	Premium on issue of bond			$1,838
	(Bonds issued at premium)
30-Jun-20	Interest expense		$1,096
	Premium on issue of bonds		$164
	Cash			$1,260
	(Interest expense booked)
31-Dec-20	Interest expense		$1,092
	Premium on issue of bonds		$168
	Cash			$1,260
	(Interest expense booked)

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