Question

December 31 each year. Assuming the market interest rate on the issue date is 8%, the bonds will issue at $373,648.
Required:
1. Complete the first three rows of an amortization table.
Date Cash Paid Interest Expense Decrease in Carrying Value Carrying Value
1/1/18
6/30/18
12/31/18
On January 1, 2018, Splash City issues $340,000 of 9% bonds, due in 20 years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 8%, the bonds will issue at $373,648.
2. Record the bond issue on January 1, 2018, and the first two semiannual interest payments on June 30, 2018, and December 31, 2018.

Answer 1

Answer:

Splash City

1. 1. The first three rows of an amortization table.

Date           Cash Paid   Interest Expense    Decrease in     Carrying Value

                                                                    Carrying Value

1/1/18          $0                                                                              $373,648

6/30/18      $15,300            $14,946                 $354                   373,294

12/31/18      $15,300              14,932                   368                   372,926

2. Journal Entries:

January 1, 2018L:

Debit Cash $373,648

Credit 9% Bonds Payable $340,000

Credit Bonds Premium $33,648

To record the proceeds from the bond issue, including the premium.

June 30, 2018:

Debit Interest Expense $14,946

Debit Amortization of Bonds Premium $354

Credit Cash $15,300

To record the first semiannual interest payment.

December 31, 2018:

Debit Interest Expense $14,932

Debit Amortization of Bonds Premium $368

Credit Cash $15,300

To record the second semiannual interest payment.

Explanation:

a) Data and Calculations:

January 1, 2018:

Face value of 9% bonds issued = $340,000

Proceeds from issue of bonds =     373,648

Premium on issue of bonds =         $33,648

Coupon Interest rate = 9%

Payment = Semiannually on June 30 and December 31

Market interest rate = 8%

June 30:

Interest expense = $14,946 ($373,648 * 4%)

Cash payment =       15,300 ($340,000 * 4.5%)

Amortized premium   $354

Fair value of bonds = $373,294 ($373,648 - $354)

December 31:

Interest expense = $14,932 ($373,294 * 4%)

Cash payment =       15,300 ($340,000 * 4.5%)

Amortized premium   $368

Fair value of bonds = $372,926 ($373,294 - $368)