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Houston Company authorized a $1,000,000, 10-year, 9% bond issue dated July 1, 2017, with semi-annual interest...

Houston Company authorized a $1,000,000, 10-year, 9% bond issue dated July 1, 2017, with semi-annual interest to be paid each December 31 and June 30. On July 1, 2017, the market rate of interest bonds 7.5% and Houston Company has a December 31 year-end.

- What is the journal entry to record the sale of the bonds?

- What is the required journal entry on December 31, 2017 to record amortization (use the effective interest method.) No adjusting journal entries were made during the year.

- What is amount of Houston’s bond liability as of December 31, 2020?

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Answer #1

Bond issue price = Present value of interest at 3.75%, 20 years + Present value of maturity amount at 3.75%, 20 years

= 1000000*9%*6/12*13.896+1000000*0.479

= $1104320

Date Accounts Debit Credit
July 1, 2017 Cash $1104320
Premium on Bonds payable 104320
Bonds payable 1000000
December 31, 2017 Interest expense (1104320*7.5%*6/12) 41412
Premium on Bonds payable 3588
Cash (1000000*9%*6/12) 45000

bond liability as of December 31, 2020 = 1000000+3588 = $1003588

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