Answer:
(a)The issuance of the bonds.
January 1, 2017, bonds are issued
Dr Cash 624,260
Cr Bonds payable 612,000
Cr Premium on bonds payable 12,260
(b)The payment of interest and related amortization on July 1, 2017.
July 1, 2017, first coupon payment
Dr Interest expense 30,497
Dr Premium on bonds payable 103
Cr cash 30,600
(c)The accrual of interest and the related amortization on December 31, 2017.
December 31, 2017, accrued interest
Dr Interest expense 30,492
Dr Premium on bonds payable 108
Cr Interest payable 30,600
Explanation:
We must first determine the market price of the bonds:
PV of face value = $612,000 / (1 + 4.88525%)⁴⁰ = $90,818.5814
PV of coupons = $30,600 x 17.43274 (PV annuity factor, 4.88525%, 40 periods) = $533,441.844
market price = $90,818.5814 + $533,441.844 = $624,260
amortization for first coupon payment:
= ($624,260 x 4.88525%) - ($612,000 x 5%) = $30,496.68194 - $30,600 = $103.31806
amortization for second coupon payment:
= ($624,156.6819 x 4.88525%) - ($612,000 x 5%) = $30,491.6143 - $30,600 = $108.3856955
