Question

On June 30, 2020, Mischa Auer Company issued $4,000,000 face value of 13%, 20-year bonds at $4,300,918, a yield of 12%. Auer uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and December 31.Prepare the journal entries to record the following transactions. (Round answer to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)(1) The issuance of the bonds on June 30, 2020.(2) The payment of interest and the amortization of the premium on December 31, 2020.(3) The payment of interest and the amortization of the premium on June 30, 2021.(4) The payment of interest and the amortization of the premium on December 31, 2021

Answer 1

Answer:

(1) The issuance of the bonds on June 30, 2020.

Dr Cash 4,300,918

    Cr Bonds payable 4,000,000

    Cr Premium on bonds payable 300,918

(2) The payment of interest and the amortization of the premium on December 31, 2020.

Dr Interest expense 258,055.08

Dr Premium on bonds payable 1,944.92

    Cr Cash 260,000

(3) The payment of interest and the amortization of the premium on June 30, 2021.

Dr Interest expense 257,938.38

Dr Premium on bonds payable 2,061.62

    Cr Cash 260,000

(4) The payment of interest and the amortization of the premium on December 31, 2021

Dr Interest expense 257,814.69

Dr Premium on bonds payable 2,185.31

    Cr Cash 260,000

Explanation:

amortization of bond premium for first coupon payment:

($4,300,918 x 6%) - ($4,000,000 x 6.5%) = $258,055.08 - $260,000 = -$1,944.92

amortization of bond premium for second coupon payment:

($4,298,973.08 x 6%) - ($4,000,000 x 6.5%) = $257,938.38 - $260,000 = -$2,061.62

amortization of bond premium for third coupon payment:

($4,296,911.46 x 6%) - ($4,000,000 x 6.5%) = $257,814.69 - $260,000 = -$2,185.31