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28 April, 12:37

On January 1, a company issues bonds dated January 1 with a par value of $310,000. The bonds mature in 5 years. The contract rate is 11%, and interest is paid semiannually on June 30 and December 31. The market rate is 10% and the bonds are sold for $321,964. The journal entry to record the first interest payment using the effective interest method of amortization is:

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  1. 28 April, 13:20
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    The journal entry for the interest payment is shown below:

    Explanation:

    Interest Expense A/c ... Dr $16,098

    Premium on bonds payable A/c ... Dr $952

    To Cash A/c ... Cr $17,050

    Working Note:

    Interest expense = Bonds sale value * Market rate

    = $321,964 * 5%

    = $16,098

    The market rate will be:

    = 10 / 2

    = 5%

    Because it is paid semiannually, so rate is divided by 2.

    Cash = Par value * Contract rate

    = $310,000 * 5.5%

    = $17,050

    The contract rate will be:

    = 11 / 2

    = 5.5%

    Because it is paid semiannually, so rate is divided by 2.
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