Question

(The following information applies to the questions displayed below.) Ike Issues $110,000 of 9%, three year bonds dated January 1, 2019, that pay interest semiannually on June 30 and December 31. They are issued at $112,881. When the market rate is 8%. 4. Prepare the journal entries to record the first two interest payments. View transaction list Journal entry worksheet < 1 2 Record the first interest payment on June 30 Note: Enter debits before credits Debit Credit General Journal Date June 30 View general Journal Clear entry Record entry of 12 Next Prev

Answer 1

Face value of the bonds issued $110,000 Price of the bonds issued $112,881 Premium on bonds issued $2,881 (Difference between $112881 and $110000) (It is considered as 'issued at premium' because issue price is higher than face value of the bonds) There are two methods to record semiannual interest payments such as effective interest rate method and straight-line method. Assuming that effective interest rate method is used to amortize premium on bonds payable: Date Jun. 30 Account Titles and Explanation Debit Interest Expense $4,515 Premium on Bonds Payable $435 Cash (To record first semiannual interest payment) Credit ($112881 x 8% / 2] [Bal. figure --> $4950 - $4515] $4,950 ($110000 x 9% / 2] (Payable on face value) Dec. 31 Interest Expense $4,498 Premium on Bonds Payable $452 Cash (To record second semiannual interest payment) [($112881 - $435) x 8% / 2] [Bal. figure --> $4950 - $4498] $4,950 ($110000 x 9% / 2] (Payable on face value)

Assuming that straight-line interest rate method is used to amortize premium on bonds payable: Date Jun. 30 Account Titles and Explanation Debit Interest Expense $4,470 Premium on Bonds Payable $480 Cash (To record first semiannual interest payment) Credit [Bal. figure --> $4950 - $480] [$2881 / 6 semiannuals] $4,950 ($110000 x 9% / 2] (Payable on face value) Dec. 31 Interest Expense $4,470 Premium on Bonds Payable $480 Cash (To record second semiannual interest payment) [Bal. figure --> $4950 - $480] ($2881 / 6 semiannuals] $4,950 ($110000 x 9% / 2] (Payable on face value) NOTE: Under this method equal amount of premium is amortized each semiannual as calculated above.