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.
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 :
|Jan 1 1877||Cash||521,880|
|Premium on bonds||21,880|
|June 30||Interest Expense||13,047|
|Premium on Bonds||1,953|
|Dec 31||Interest Expense||12,998|
|Premium on Bonds||2,002|
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