Question

Pretzelmania, Inc., issues 5%, 20-year bonds with a face amount of $56,000 for $63,660 on January 1, 2021. The market interest rate for bonds of similar risk and maturity is 4%. Interest is paid semiannually on June 30 and December 31.
1. & 2. Record the bond issue and first interest payment on June 30, 2021.

Answer 1

Answer:

Bond issue:

Dr cash     $63,660

Cr Bonds payable                    $56,000

Cr Premium on bonds payable $7,660

Interest payment:

Dr Interest expense                     $1,273.2

Dr Premium on bonds payable    $126.8

Cr  Cash                                                       $1,400

Explanation:

The bond issue brought about cash proceeds of $63,660 which implies that the bonds were issued at a premium  of $7660  ($63,660-$56,000) above the par value of $56,000.This means that cash account would be debited with $63,660 while bonds payable and premium on bonds payable would be credited with $56,000 and $7660 respectively.

The interest payment=$56,000*5%*6/12=$1400

interest expense=$63,660*4%*6/12=$1273.2

The premium amortization=interest payment -interest expense

                                           =$1400-$1273.2 =$126.8

Answer 2

Answer:

cash  63,660 debit

  bonds payable   56,000 credit

  premium on BP     7,660  credit

--to record issuance--

interest expense 1,273.5 debit

premiun on BP      318.3 debit

      cash                     1,591.5 credit

--to record June 30th 2021 interest payment--

Explanation:

the cash received will be debited while the bonds liabiltiy credit.

The difference as we receive above face value will be considered a premium and is a credited as well.

The interest expense will be the carrying value times market rate:

63,660 x 4% x 1/2 = 1,273.2

Then, we calculate the actual cash outlay:

63,660 x 5% x 1/2 = 1,591.5

The difference adjust the premium on BP : 1,591.5 - 1,273.2 = 318.3