Question

The Gillman Group issued $900,000 of 13% bonds on June 30 Year 1, for $967,707. The bonds were dated on June 30 and mature on June 30, Year 21 (20 years). The market rate for bonds of similar risk and maturity is 12%. Interest is payable semiannually on June 30 and December 31.

Instructions:

A. Prepare the journal entry to record the issuance of the bonds on June 30, Year 1.

B. Prepare the journal entry to record interest expense on December 31, Year 1 on the effective-

     interest method.  

C. Prepare the journal entry to record interest expense on June 30, Year 2 on the effective-

     interest method.

Answer 1

Date June 30 Year 1 Issue Entry 1. Record the Bond Issue General Journal Cash Premium on Bonds Payable Bonds Payable Record the issue of the Bond with Premium Debit Credit 967707 67707 900000 Date Dec 31 Year 1 Journal entries for interest Payment Record the interest payment and amortization General Journal Debit Credit Interest Expenses 58062 Premium on Bonds Payable 438 Cash 58500 Record the interest Expense and amortization of Premium General Journal Debit Credit Interest Expenses 58036 Premium on Bonds Payable 464 Cash 58500 Date June 30 Year 2

900000 967707 58500 58062 58036 Face Value Isssue Price Cash interest =900000*13%*6/12 Interest Expenses=967707*12%*6/12 967269*12%*6/12 Amortization Schedule Interest Date Cash Paid Expense June 30 Year 1 Dec 31 Year 1 58500 58062 June 30 Year 2 58500 58036 Premium amortized Carrying Value 967707 967269 966806 438 464