Answer:
Explanation:
Issue price of bond = $330,654
Face Value = $272000
Premium on issue of bond = $330,654 - $272000 = 58654
Journal entry for bond issuance:
Cash Dr $330,654
Bonds Payable $272000
Premium on Bonds payable $58654
(Being bond issued at a premium of $58654)
As per effective interest method, interest expense = market rate * book value of bond
= 6.5% * $330,654 = $21492.5
Cash interest = $272000 * 9.5% = $25840
Premium to be amortized on interest date = $25840 - $21492.5 = $4347.5 or $4348
Journal entry for interest payment on December 31:
Account Financial Issuance Interest paid
Statement
Bonds payable Balance Sheet 272000
Discount on Bonds payable NA NA NA
Interest expense Income Statement 0 21492.5
Premium on Bonds Payable Balance Sheet 58654 -3813
Note: Interest expense for the year:
Interest to be paid ($272000 * 9.5%) 25840
Less: Amortization of Premium (58654/6.5) 3813
Interest expense 21492.5
Journal entry:
Interest expense Dr. 21492.5
Premium on Bonds payable Dr. 3813
Cash Account 25306
Note: here, it has been premium has been written on Straight line basis.
