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The Windy City Company issued $500,000 of 12% bonds on January 1, 2016. The bonds were...

The Windy City Company issued $500,000 of 12% bonds on January 1, 2016. The bonds were sold for $549,493, and they were expected to yield 10% interest compounded semiannually. The interest dates are June 30 and December 31. The maturity date of the bonds is December 31, 2022.

Required:

a.

Prepare the journal entry to record the issuance of the bonds.

b.

Using the effective interest method, prepare the journal entries to record the first two interest payments.
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Answer #1
Effective interest method
12% 10%
Year Cash paid Interest expense Premium amortized Premium on bonds Carrying amount
49493 549493
30-06-2016 30000 27475 2525 46968 546968
31-12-2016 30000 27348 2652 44316 544316
01-01-2017 Cash 549493
           Premium on bonds payable 49493
           Bonds payable 500000
31-12-2017 Interest expense 27475
Premium on bonds payable 2525
                 Cash 30000
31-12-2019 Interest expense 27348
Premium on bonds payable 2652
                 Cash 30000
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