Answer and Explanation:
Before recording the journal entry first we have to determine the following calculations
Semi Annual interest payment is
= $275,000 x 10% × 6 ÷ 12
= $13,750
The Present value of principal is
= Par value of bonds × Present value factor (r%, n)
= $275,000 × Present value factor (4.5%, 10)
= $275,000 × 0.64393
= $177,080.75
Now Present value of interest is
= Interest × Present value annuity factor (r%, n)
= $13,750 × Present value annuity factor (4.5%, 10)
= $13,750 × 7.91272
= $108,799.90
Now
The Selling price of bond is
= Present value of principal + Present value of interest
= $177,080.75 + $108,799.9
= $285,881
Interest expense to be recorded is
= Carrying value of bonds × Effective interest rate × 6 ÷12
= $285,881 × 9% × 6 ÷ 12
= $12,865
And,
The Premium on bonds payable is
= Semi annual interest payment - Interest expense
= $13,750 - $12,865
= $885
Now the journal entry is
Interest expense $12,865
Premium on bonds payable $885
To Cash $13,750
(Being the interest payment is recorded)