Question

On March 1, 2019, Face Corporation issues 5-year bonds, dated January 1, 2019, with a face value of $200,000. These bonds have an annual interest rate of 10%, payable semiannually on January 1 and July 1. The effective interest rate is 8%. The fiscal year ends on December 31. (rounding up to the nearest dollar)

1. Prepare the journal entry to record the bond issuance plus accrued interest on March 1, 2019. (Use effective interest method)

2. Prepare the journal entry to record the payment of interest and related amortization on July 1, 2019. (Use effective interest method)

3. Prepare the journal entry to record the payment of interest and related amortization on December 31, 2019. (Use effective interest method)

Answer 1

Face Corporation Schedule of Bond Premium Amortization Effective-Interest Method Calculation Premium amortized Cash paid Interest expense Premium amortized Unamortized Premium Carrying Amt Unamortized Premium Date Interest expense 10% 8% 1-Mar-19 16,222 216.222 216.222-200.000 216,222*8% 6/12 214,871*8 % *6/12 1-Jul-19 14,871 10,000-8,649 16,222-,1351 10,000 8,649 1,351 214,871 10,000 8,595 13.465 10,000-8.595 1-Jan-20 1,405 213,465 14,871-1,405 1-Jul-20 10,000 8,539 213,465*8% 6/12 10,000-8,539 1,461 12,004 212,004 13,465-1,461 10,000 1-Jan-21 8,480 1,520 10,484 210,484 1-Jul-21 10,000 8,419 1,581 8,904 208,904 10,000 8.356 7,260 1-Jan-22 1,644 207,260 1-Jul-22 5,550 10,000 8,290 1,710 205,550 1-Jan-23 10,000 8,222 1,778 3,772 203,772 1-Jul-23 10,000 8.151 1,849 1.923 201,923 1-Jan-24 10.000 8.077 1.923 200,000 Carrying amt*8% "6/ 12 200,000 10%6/12 Calc Cash paid less int exp Face amt less Unamortized Premium Calculation Present Value (PV) Amount =10,000*(1-(1/(1+4%)^10))/4% Interest PV 81,109 135,113 200,000/(1+4%)^10 PV Maturity Total PV 216,222 Initial Carrying Amount Maturity Value Bond Premium (200,000) 16,222 8% Interest rate annual 4% Interest rate semi annual Number of years Number of periods 5 10

Face Corporation Journal entries Credit Debit Calculation Date Account $219,555 1-Mar-19 Cash Bonds Payable Premium on Bonds Payable 200,000 $ As per table 16,222 Interest Payable 3,333 200,000*10%*2 /12 1-Jul-19 Interest expense 8,649*4 months/6 months $ 5,766 Premium on Bonds Payable 1,351*4 months/6 months 901 |Interest Payable 4 months from Mar 1 to July 1 $3,333 Cash 10,000 31-Dec-19 Interest expense As per table 8,595 Premium on Bonds Payable 1,405 As per table Interest Payable 10,000