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On January 1 of Year 1, Lily Company issued a $100,000, 16%, 10-year bond. Interest is...

On January 1 of Year 1, Lily Company issued a $100,000, 16%, 10-year bond. Interest is paid semi-annually each June 30 and December 31, so the first contract interest payment was made on June 30 of Year 1 and the second contract interest payment was made on December 31 of Year 1. On the day the bond was issued, the annual market interest rate on bonds with the same degree of riskiness was 8%. Lily uses the effective-interest method on its books. Note: Round all calculations to the nearest dollar. The entry to record the FIRST contract interest payment on June 30 of Year 1would include a

CREDIT to Premium on Bonds of $6,173

DEBIT to Premium on Bonds of $6,173

CREDIT to Premium on Bonds of $1,827

CREDIT to Premium on Bonds of $1,900

DEBIT to Premium on Bonds of $1,827

DEBIT to Premium on Bonds of $1,900

CREDIT to Premium on Bonds of $6,100

DEBIT to Premium on Bonds of $6,100
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Answer #1

Ans:

Face Value : $100,000

Stated Rate : 16%

Coupon Rate : 8% (Semi annual)

Interest Payment periodical : $100,000 * 8% = $8,000

Market rate : 8%

Periodical market rate : 4% (Semi annual)

Life 10 years: (20 periods)

Annuity Factor@ 4% for 20 periods: 13.59033

PV Factor @4% for 20 peridos: 0.45639

Issue Price of Bonds : $8,000 * 13.59033 + $100,000 * 0.45639 = $154,362

First Interest Expense : $154,362 * 4% = $6,173

First Interest Payment : $100,000 * 8% = $8,000

Premium amortised : $8,000 - $6,173= $1,827 (Debit)

So correct answer is DEBIT to Premium on Bonds of $1,827.

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