Answer:
1. Assume the company sells the bonds for $102,458.71 to yield 12%. Prepare the journal entries to record the sale of the bonds and each 2019 semiannual interest payment and premium amortization, using the effective interest method.
January 1, 2019, bonds issued at a premium
Dr Cash 102,458.71
Cr Bonds payable 100,000
Cr Premium on bonds payable 2,458.71
June 30, first coupon payment
Dr Interest expense 6,147.52
Dr Premium on bonds payable 352.48
Cr Cash 6,500
December 31, second coupon payment
Dr Interest expense 6,126.37
Dr Premium on bonds payable 373.63
Cr Cash 6,500
amortization of bond premium = ($102,458.71 x 6%) - $6,500 = -$352.48
amortization of bond premium = ($102,106.23 x 6%) - $6,500 = -$373.63
2. Assume the company sells the bonds for $97,616.71 to yield 14%. Prepare the journal entries to record the sale of the bonds and each 2019 semiannual interest payment and discount amortization, using the effective interest method.
January 1, 2019, bonds issued at a discount
Dr Cash 97,616.71
Dr Discount on bonds payable 2,383.29
Cr Bonds payable 100,000
June 30, first coupon payment
Dr Interest expense 6,833.17
Cr Cash 6,500
Cr Discount on bonds payable 333.17
December 31, second coupon payment
Dr Interest expense 6,856.49
Cr Cash 6,500
Cr Discount on bonds payable 356.49
amortization of bond discount = ($97,616.71 x 7%) - $6,500 = $333.17
amortization of bond discount = ($97,949.88 x 7%) - $6,500 = $356.49
