Question

Effective Interest Amortization
On January 1, Eagle, Inc., issued $950,000 of 9%, 20-year bonds for $1,016,500 yielding an effective interest rate of 8%. Semiannual interest is payable on June 30 and December 31 each year. The firm uses the effective interest method to amortize the premium.

Required
a. Prepare an amortization schedule showing the necessary information for the first two interest periods. Round amounts to the nearest dollar.
b. Prepare the journal entry for the bond issuance on January 1.
c. Prepare the journal entry to record the bond interest payment and premium amortization at June 30.
d. Prepare the journal entry to record the bond interest payment and premium amortization at December 31.

a.

Year	Interest Period	Interest Paid	Interest Expense	Periodic Amortization	Balance of Unamortized Discount	Book Value of Bonds End of Period
at issue		0	0	0	?	?
1	1	?	?	?	?	?
	2	?	?	?	?	?

General Journal
Date	Description	Debit	Credit
b.
Jan.1	Cash	?
	Premium on Bonds Payable		?
	Bonds Payable		?
	To record issuance of bonds.
c.
Jun.30	Bond Interest Expense	?
	Premium on Bonds Payable	?
	Cash		?
	To record semiannual interest payment and premium amortization.
d.
Dec.31	Bond Interest Expense	?
	Premium on Bonds Payable	?
	Cash		?
	To record semiannual interest payment and premium amortization.

Answer 1

Req a:
Amortization Table:
Year	Interest	Interest	Interest	Periodic	Balance of		Book Value
	Period	Paid	Expense	Amort	Unamotized prem.		Of bonds
At issue					66500		1016500
1	1	42750	40,660	2,090	64,410		1,014,410
	2	42750	40,576	2,174	62,236		1,012,236
Req
Journal entries:
Date	Accounts title and explanations				Debit $	Credit $
1-Jan	Cash Account Dr.				1016500
	Bonds payable Account					950000
	Premium on Bonds payable Account					66500
30-Jun	Interest expense Account Dr.				40660
	Premium on Bonds payable Account Dr.				3090
	Cash account					42750
31-Dec	Interest expense Account Dr.				40576
	Premium on Bonds payable Account Dr.				2174
	Cash account					42750