Question

On January 1, a company issued 10%, 10-year bonds payable with a par value of $720,000....

On January 1, a company issued 10%, 10-year bonds payable with a par value of $720,000. The bonds pay interest on July 1 and January 1. The bonds were issued for $817,860 cash, which provided the holders an annual yield of 8%. Prepare the journal entry to record the first semiannual interest payment, assuming it uses the straight-line method of amortization.

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Answer #1

Par value of bonds = $720,000

Stated interest rate= 10%

Issue price of bonds = $817,860

Premium on bonds payable = Issue price of bonds - Par value of bonds

= 817,860-720,000

= $97,860

Semi annual interest payment = Par value of bonds x Stated interest rate x 6/12

= 720,000 x 10% x 6/12

= $36,000

Semi annual amortization of bond premium = Premium on bonds payable / Semi annual interest payment periods

= 97,860/20

= $4,893

Date General Journal Debit Credit
July 1 Interest expense $31,107
Premium on bonds payable $4,893
Cash $36,000
( To record first semi annual interest payment)

Kindly comment if you need further assistance. Thanks‼!            

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