Answer:
Explanation:
Issue price of bond = $330,654
Face Value = $272000
Premium on issue of bond = $330,654 - $272000 = 58654
Journal entry for bond issuance:
Cash Dr $330,654
Bonds Payable $272000
Premium on Bonds payable $58654
(Being bond issued at a premium of $58654)
As per effective interest method, interest expense = market rate * book value of bond
= 6.5% * $330,654 = $21492.5
Cash interest = $272000 * 9.5% = $25840
Premium to be amortized on interest date = $25840 - $21492.5 = $4347.5 or $4348
Journal entry for interest payment on December 31:
Account                            Financial            Issuance  Interest paid
                                          Statement    
Bonds payable                 Balance Sheet  272000  
Discount on Bonds payable  NA                NA                     NA  
Interest expense               Income Statement   0                 21492.5
Premium on Bonds Payable     Balance Sheet  58654          -3813	
    
Note: Interest expense for the year:    
Interest to be paid ($272000 * 9.5%)                25840  	
Less: Amortization of Premium (58654/6.5)      3813  
Interest expense                                                21492.5  	
    
Journal entry:    	
Interest expense Dr.                                          21492.5  
Premium on Bonds payable Dr.                          3813  	
        Cash Account                                                                 25306  
Note: here, it has been premium has been written on Straight line basis.