Question

Avery Companies Ltd issued $500,000 of 6%, 5 year bonds for $521,880 on January 1, 1877, the day the bonds were dated. The market rate on this date was 5%. Interest is paid semi-annually on June 30 and December 31. The effective interest method is used to allocate the interest.
Required: Note: Round all answers to the nearest dollar

a. Prepare the journal entry required to record the issuance of the bond.
b. Prepare the journal entries required to record the first and second interest payments.

Answer 1

Ans:

Face Value of Bonds : $500,000

Interest Rate : 6%

Coupon (Semi annually) : $500,000*6%*1/2 = $15,000

Issue Price : $521,880

Martket Coupon rate : 5%/2 = 2.5%

Premium on issue : $521,880 - $500,000 = $21,880

Interest Expense :

First Payment : $521,880*2.5% = $13,047

Bond Value After First Payment : $521,880 + $13,047 - $15,000 = $519,927.

Second Payment : $519,927*2.5% = $12,998

Required Journal Entries will be :

Date	Account Title	Debit	Credit
Jan 1 1877	Cash	521,880
	Bonds Payable		500,000
	Premium on bonds		21,880
June 30	Interest Expense	13,047
	Premium on Bonds	1,953
	Cash		15,000
Dec 31	Interest Expense	12,998
	Premium on Bonds	2,002
	Cash		15,000

For any query please ask in comment box, we are happy to help you. Also please don't forget to provide your valuable feedback. Thanks!