Homework Answers
(a) $100 bonds are issued at $101.
Proceeds from bond issue = $330000 * 101 / 100 = $333300
Required journal entry is:
| Date | General Journal | Debit | Credit |
| January 1, 2017 | Cash | $333300 | |
| Bonds payable | $330000 | ||
| Premium on bonds payable | $3300 | ||
| (for bonds issued at premium) |
(b) Under the straight line method, bond premium is amortized over the life of the bond. Here,
Bond premium = $3300, Life of the bond = 5 * 2 = 10 semi annual years
Straight line amortization of bond premium = $3300 / 10 = $330
Semi annual cash payment of interest = 7% * $330000 * 6 /12 = $11550
Interest expense under straight line method is:
Interest expense = Cash paid for interest - Premium
Interest expense = $11550 - $330 = $11220
Required journal entry is:
| Date | General Journal | Debit | Credit |
| July 1, 2017 | Interest expense | $11220 | |
| Premium on bonds payable | $330 | ||
| Cash | $11550 | ||
| (for semi annual bond interest payment and bond premium amortization) |
(c) Journal entry on December 31 will be same as above entry:
| Date | General Journal | Debit | Credit |
| December 31, 2017 | Interest expense | $11220 | |
| Premium on bonds payable | $330 | ||
| Cash | $11550 | ||
| (for semi annual bond interest payment and bond premium amortization) |
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