Question

The Gorman Group issued $880,000 of 13% bonds on June 30, 2018, for $946,202. The bonds were dated on June 30 and mature on June 30, 2038 (20 years). The market yield for bonds of similar risk and maturity is 12%. Interest is paid semiannually on December 31 and June 30.

Required:
Record the company's journal entry.

Answer 1

Missing word: "a. to record their issuance by The Gorman Group on June 30, 2018, b. interest on December 31, 2018 and c. interest on June 30, 2019 (at the effective rate)."

Par value of bonds = $880,000

Semi annual interest payment = 880,000 x 13% x 6/12 = $57,200

Effective interest rate = 12%, Semi annual Effective interest rate = 6%

Issue price of bonds = $946,202

Premium on bonds payable = Issue price of bonds - Par value of bonds = $946,202 - $880,000 = $66,202

a. Journal Entry on June 30, 2018

Date Account Debit Credit

6/30/2016 Cash 946,202

Bonds payable 880,000

Premium on Bonds payable 66,202

b. Journal Entry on on December 31, 2018

Date Account Debit Credit

12/31/2016 Interest expense 56,772

(946,202 x 6%)

Premium on bonds payable 428

(57,200 - 56,772)

Cash 57,200

c. Journal Entry on on June 30, 2019

Date Account Debit Credit

6/30/2019 Interest expense 56,746

(945,774 x 6%)

Premium on bonds payable 428

(57,200 - 56,746)

Cash 57,200