Answer:
1. Dr Cash 481,588.61
Cr Bonds payable 450,000
Cr Premium on bonds payable 31,588.61
2. March 31
Dr Interest expense 14,447.66
Dr Premium on bonds payable 3,552.34
Cr Cash 18,000
June 30
Dr Interest expense 14,341.09
Dr Premium on bonds payable 3,658.91
Cr Cash 18,000
September 30
Dr Interest expense 14,231.32
Dr Premium on bonds payable 3,768.68
Cr Cash 18,000
December 31
Dr Interest expense 14,118.26
Dr Premium on bonds payable 3,881.74
Cr Cash 18,000
3. carrying value = $466,726.94
Explanation:
face value = $450,000
maturity = 2 years x 4 = 8 periods
coupon rate = 16% / 4 = 4%
coupon = $18,000
YTM = 12% / 4 = 3%
using a financial calculator, the PV of the bonds = $481,588.61
amortization first coupon = ($481,588.61 x 3%) - $18,000 = $3,552.34
Dr Interest expense 14,447.66
Dr Premium on bonds payable 3,552.34
Cr Cash 18,000
amortization second coupon = ($478,036.27 x 3%) - $18,000 = $3,658.91
Dr Interest expense 14,341.09
Dr Premium on bonds payable 3,658.91
Cr Cash 18,000
amortization third coupon = ($474,377.36 x 3%) - $18,000 = $3,768.68
Dr Interest expense 14,231.32
Dr Premium on bonds payable 3,768.68
Cr Cash 18,000
amortization fourth coupon = ($470,608.68 x 3%) - $18,000 = $3,881.74
Dr Interest expense 14,118.26
Dr Premium on bonds payable 3,881.74
Cr Cash 18,000
