Question

# Avery Companies Ltd issued \$500,000 of 6%, 5 year bonds for \$521,880 on January 1, 1877,...

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.

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