Question

A company issues 5%, 8-year bonds with a face amount of $70,000 for $74,752 on January 1, 2021. The market interest rate for bonds of similar risk and maturity is 4%. Interest is paid semiannually on June 30 and December 31. Required: 1. & 2. Record the bond issue and first interest payment on June 30, 2021. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field. Do not round intermediate calculations. Round your answers to the nearest dollar amount.)

Answer 1

January 1, 2021

Dr. Cash $74,752

Cr. Bond Payable $70,000

Cr. Bond Premium $4,752

June 30, 2021

Dr. Interest Expense $1,495

Dr. Premium on Bond $255

Cr. Cash $1,750

Step-by-step explanation:

The bond is issued on premium when the issuance price of the bond is higher than the face value of the bond. This premium value is recorded and amortized over the the bonds life to maturity.

Premium = Issuance value - Face value = $74,752 - $70,000 = $4,752

Interest Payment = $70,000 x 5% = $3,500

Premium Amortisation = $3,500 - ( $74,752 x 4% ) = $510

Interest Expense = $3,500 - 5510 = $2,990