Question

On December 31, 20X1, Loon Company issues $2,000,000 face value, 5%, 5-year bonds. Interest is paid semiannually each June 30 & December 31. The bonds sell at a price of 101; Loon uses the straight-line method of amortizing bond discount/premium.

Record the first semiannual payment of interest and amortization of discount/premium on the bonds at June 30, 20X2.

Answer 1

Solution

Date	Account Title and Explanation	Debit	Credit
June 30, 20X2	Bond interest expense	$ 48,000
	Premium on bonds payable	$ 2,000
	Cash		$ 50,000
	(Interest on bond paid and Premium amortized)

Working

Bond issue price (2000000/100 x 101)	$ 2,020,000
Face value	$ 2,000,000
Premium on bonds payable	$ 20,000
Number of Interest payments (5 years x 2)	10
Discount/ premium to be amortized per Half year	$ 2,000
Cash Interest on bond (2000000 x 2.5%)	$ 50,000
Interest expense to be recorded (50000-2000)	$ 48,000