Question

Shunda Corporation wholesales parts to appliance manufacturers. On January 1, Shunda issued $30,000,000 of five-year, 10% bonds at a market (effective) interest rate of 8%, receiving cash of $32,433,150. Interest is payable semiannually. Shunda’s fiscal year begins on January 1. The company uses the interest method.
a. Journalize the entries to record the following:

1. Sale of the bonds. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

2. First semiannual interest payment, including amortization of premium. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

3. Second semiannual interest payment, including amortization of premium. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

b. Determine the bond interest expense for the first year. Round to the nearest dollar.

Annual interest paid $
Less premium amortized
Interest expense for first year

Answer 1

Answer and Explanation:

a. The Journal entry is shown below:-

1. Cash Dr, $32,433,150  

     To Premium on Bonds Payable $2,433,150  

      To Bonds Payable $30,000,000

(Being Sale of bonds is recorded)

2. Interest Expense Dr, $1,297,326

($32,433,150 × 4%)  

Premium on Bonds Payable Dr, $202,674  

   To Cash $1,500,000

($30,000,000 × 5%)

(Being First semiannual interest payment, including amortization of premium is recorded)

3. Interest Expense Dr, $1,289,219

($32,433,150 - $202,674) × 4%

Premium on Bonds Payable Dr, $210,781

      To Cash $1,500,000

(Being second semiannual interest payment, including amortization of premium is recorded)

($30,000,000 × 5%)

b. Annual interest paid             $3,000,000  

Less: Premium amortized          $364,094

($202,674 + $161,420)

Interest expense for first year    $2,635,906