Question

On January 1, 2021, a company issues $720,000 of 8% bonds, due in six years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 7%, the bonds will issue at $754,788.
Required:
(a) Record the bond issue on January 1, 2021, and the first two semi-annual interest payments on June 30, 2021, and December 31, 2021. (Round your answers to the nearest dollar amount.)

Answer 1

Answer:

a.

1 Jan 2021   Cash                                             $754788 Dr

                         Bonds Payable                            $720000 Cr

                         Premium on Bonds Payable       $34788 Cr

30 June 2021  Interest Expense          $28800 Dr

                               Cash                             $28800 Cr

31 Dec 2021    Interest Expense           $28800 Dr

                               Cash                               $28800 Cr

Explanation:

The bonds are issued at more than their par value thus, it is an issue on premium. The premium amount is the difference in issue value and par value = 754788 - 720000 = 34788

The interest is payable on 8% p.a of par value which come out to be 720000 * 0.08 = 57600

This interest is paid semi annually in cash. the semi annual payment will be 57600 / 2 = $28800