Question

Pretzelmania, Inc., issues 6%, 10-year bonds with a face amount of $63,000 for $67,911 on January 1, 2021. The market interest rate for bonds of similar risk and maturity is 5%. Interest is paid semiannually on June 30 and December 31. Required: 1. & 2. Record the bond issue and first interest payment on June 30, 2021. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field. Round your intermediate computations and final answers to the nearest whole dollar amount.)

Answer 1

Answer:

The bonds were sold at a premium since the market price was higher than the face value. The bond premium = $67,911 - $63,000 = $4,911

Using the effective interest method to discount the bond premium, the interest expense on June 30, 2021 will be:

($63,000 x 3%) - ($67,911 x 2.5%) = $1,890 - $1,698 = $192

The journal entry that records the issue of the bonds

January 1, 2021, bonds issued at a premium:

Dr Cash 67,911

    Cr Bonds payable 63,000

    Cr Premium on bonds payable 4,911

The journal entry that records the first coupon payment

June 30, 2021, firs coupon payment:

Dr Interest expense 1,698

Dr Premium on bonds payable 192

    Cr Cash 1,890