Response to the following problem:
A company issued 10%, 5-year bonds with a par value of $2,000,000, on January 1, 2005. Interest is to be paid semiannually each June 30 and December 31. The bonds were sold at $2,162,290 to yield the buyers an 8% annual return. The company uses the effective interest method of amortization.
(1) Prepare the journal entry to record the issuance of the bonds.
Dr Cash 2,162.290
Cr Premium on Bonds Payable 162,290
Cr Bonds Payable 2,000,000
(2) Prepare an amortization table for the first two semiannual payment periods using the format shown below.
At issue date:
Unamortized Premium 162,290
Carrying Value 2,162,290
1st Payment
Cash Payment 100,000 (2,000,000 x 5% stated rate)
Interest Expense 86,492 (2,162,290 x 4% effective interest)
Premium Amortization 13,508 (100,000 - 86,492)
Unamortized Premium 148,782 (162,290 - 13,508)
Carrying Value 2,148,782 (2,162,290 - 13,508)
2nd Payment
Cash Payment 100,000 (2,000,000 x 5% stated rate)
Interest Expense 85,951 (2,148,782 x 4% effective interest)
Premium Amortization 14,049 (100,000 - 85,951)
Unamortized Premium 134,733 (148,782 - 14,049)
Carrying Value 2,134,733 (2,148,782 - 14,049)
3. Prepare the journal entries to record the first two semiannual interest payments.