Answer:
(a) Bond issuance:
Debit Cash $1,423,060
Credit Bonds payable $1,400,000
Credit Premium on bond payable $23,060
<em>(To record bond issuance)</em>
(b) June 20 interest payment
Debit Interest expense (balancing figure) $81,694
Debit Premium on bond payable $2,306
Credit Cash $84,000
<em>(To record first interest payment - June 30)</em>
(c) December 31 interest payment
Debit Interest expense (balancing figure) $81,694
Debit Premium on bond payable $2,306
Credit Cash $84,000
<em>(To record first interest payment - December 31 )</em>
Explanation:
A bond is a long-term promissory note issued by a company in order to borrow from investors to fund its business operations.
Calculation of the interest expense:
Premium on bonds payable (balancing figure) = $23,060
Number of periods = 5 years x 2 = 10 periods
Amortization of premium on bond payable = $23,060 / 10 periods = $2,306
Calculation of the cash proceed:
Cash = Face value of bond x contractual interest x Time period
Cash = $1,400,000 x 12% x 6 / 12 = $84,000 (see the journals above)
