Question

On December 31, 2019, Spearmint, Inc., issued $450,000 of 9 percent, 3-year bonds for cash of $461,795. After recording the related entry, Bonds Payable had a balance of $450,000 and Premium on Bonds Payable had a balance of $11,795. Spearmint uses the straight-line bond amortization method. The first semiannual interest payment was made on June 30, 2020.
Required:
Complete the necessary journal entry for June 30, 2020.

Answer 1

Answer: Please refer to Explanation

Explanation:

June 30, 2020

DR Bond Interest Expense $18,284

DR Premium on Bonds Payable $1,966

CR Cash $20,250

(To record Payment of Bond Interest)

Workings

Cash

Semi Annual Payment of Interest means that the interest rate of 9% which is annual will be split into 2 to make it 4.5% to make it semi annual.

= 450,000 * 4.5%

= $20,250

Premium on Bonds Payable

The straight-line bond amortization method means that a Bond's Discount or Premium amount will be amortized in equal proportions for the duration of the bond's life.

Seeing as there are semi annual payments, the Premium will be amortized semi-annually.

There are 3 years so semi-annually would be,

= 3 * 2

= 6 periods.

Semi- Annual Bond Amortization for the premium is therefore,

= 11,795/6

= $1,966

Bond Interest Expense

= Cash - Premium on Bonds Payable

= 20,250 - 1,966

= $18,284