Question

Matt Winne​, Inc. issued $ 1 comma 000 comma 000 of 9​%, nine​-year bonds payable on January​ 1, 2018. The market interest rate at the date of issuance was 6​%, and the bonds pay interest semiannually.

1) How much cash did the company receive upon issuance of the bonds​ payable?
2) Prepare an amortization table for the bond using the​effective-interest method, through the first two interest payments.​ (Round to the nearest​ dollar.)
3) Journalize the issuance of the bonds on January​ 1, 2018​, and the first and second payments of the semiannual interest amount and amortization of the bonds on June​ 30, 2018​, and December​ 31, 2018. Explanations are not required. ​
4) Journalize the payment of the first semiannual interest amount and amortization of the bond on June​ 30, 2018
5) Journalize the payment of the second semiannual interest amount and amortization of the bond on December​ 31, 2018.​

Answer 1

1) $1,223,163

2) bond premium amortization coupon 1 = $8,305

bond premium amortization coupon 2 = $8,554

3)

January 1, 2018, bonds are issued

Dr Cash 1,223,163

Cr Bonds payable 1,000,000

Cr Premium on bonds payable 223,163

4)

June 30, 2018, first coupon payment

Dr Interest expense 36,695

Dr Premium on bonds payable 8,305

Cr Cash 45,000

5)

December 31, 2018, second coupon payment

Dr Interest expense 36,446

Dr Premium on bonds payable 8,554

Cr Cash 45,000

Step-by-step explanation:

bonds price = PV of face value + PV of coupons

PV of face value = $1,000,000 / 1.03²⁰ = $553,675.75

PV of coupon payments = $45,000 x 14.8775 (annuity factor 3%, 20 payments) = $669,487.50

issue price = $553,675.75 + $669,487.50 = $1,223,163.25 ≈ $1,223,163

Dr Cash 1,223,163

Cr Bonds payable 1,000,000

Cr Premium on bonds payable 223,163

amortization coupon 1 = $45,000 - ($1,223,163 x 3%) = $45,000 - $36,695 = $8,305

amortization coupon 2 = $45,000 - ($1,214,858 x 3%) = $45,000 - $36,446 = $8,554