Question

On December 31, 2018, P. Star Corporation issued $300,000, 12%, 15-year bonds for $346,120 cash when the market rate of interest was 10%. The bonds pay interest semi-annually each June 30 and December 31. P. Star uses the effective interest method of amortization to amortize any premium or discount. Give the required journal entries on (1) December 31, 2018, the issue date and (2) June 30, 2019, the first interest payment date in the attached workpaper. You do not have to make an entry here at Wileyplus for this question.

Answer 1

Solution Face Value of Bonds $300,000 Bond issue price $346,120 Premium on issue of Bonds ($346,120-$300,000) $46,120 Stated rate of interest 12% Market rate of interest 10% Bond life 15 Years Interest payment frequency Semi-Annual Semi-Annual interest payment = $300,000 x 12 % x 6/12 = $18,000 Effective Interest Amortization Table (Partial) Effective Interest Amortization Table (Partial) Stated Effective Carrying Date Amortization Value Interest Interest $346,120 ssue 6/30/2019 12/31/2019 6/30/2020 |12/31/2020 $17,306 $17,271 $17,235 $694 $729 $18,000 $345,426 $344,697 $18,000 $18,000 $765 $343,932 $18,000 $17,197 $803 $343,129 Required 1: Journal Entries General Journal Account Titles Debit Credit Date Dec.31, 2018 Cash $346,120 $300,000 $46,120 Bonds Payable Premium on Bonds Payable (To record issue of bonds at premium) Jun.30, 2019 Interest Expense $17,306 Premium on Bonds Payable $694 Cash $18,000 (To record first interest payment) Required 2: Total interest expense to be recorded over the life of the bond Total cash interest payment over the life of the bond ($18,000 x 15 x 2) $540,000 Payment of face value on maturity $300,000 Total cash payment over the life of bond $840,000 Less: Issue price of bonds ($346,120) $493,880 Total interest expense to be recorded over the life of the bond Total dollar amount of interest to be recorded over the life of the bond $493,880 Required 3: Balance sheet presentation of Bond liability on December 31, 2020 Balance Sheet (Partial) Long-term liabilities: 12%, 15-year Bonds Add: Unamortized premium on Bonds payable $300,000 $343,129 $43,129