Question

Ayayai Company issued $612,000 of 10%, 20-year bonds on January 1, 2017, at 102. Interest is payable semiannually on July 1 and January 1. Ayayai Company uses the effective-interest method of amortization for bond premium or discount. Assume an effective yield of 9.7705%. Prepare the journal entries to record the following. (Round intermediate calculations to 6 decimal places, e.g. 1.251247 and final answer to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) (a)The issuance of the bonds. (b)The payment of interest and related amortization on July 1, 2017. (c)The accrual of interest and the related amortization on December 31, 2017.

Answer 1

(a)The issuance of the bonds.

January 1, 2017, bonds are issued

Dr Cash 624,260

Cr Bonds payable 612,000

Cr Premium on bonds payable 12,260

(b)The payment of interest and related amortization on July 1, 2017.

July 1, 2017, first coupon payment

Dr Interest expense 30,497

Dr Premium on bonds payable 103

Cr cash 30,600

(c)The accrual of interest and the related amortization on December 31, 2017.

December 31, 2017, accrued interest

Dr Interest expense 30,492

Dr Premium on bonds payable 108

Cr Interest payable 30,600

Step-by-step explanation:

We must first determine the market price of the bonds:

PV of face value = $612,000 / (1 + 4.88525%)⁴⁰ = $90,818.5814

PV of coupons = $30,600 x 17.43274 (PV annuity factor, 4.88525%, 40 periods) = $533,441.844

market price = $90,818.5814 + $533,441.844 = $624,260

amortization for first coupon payment:

= ($624,260 x 4.88525%) - ($612,000 x 5%) = $30,496.68194 - $30,600 = $103.31806

amortization for second coupon payment:

= ($624,156.6819 x 4.88525%) - ($612,000 x 5%) = $30,491.6143 - $30,600 = $108.3856955