On January 1,a company issues bonds dated January 1 with a par value of $300,000.The bonds mature in 5 years.The contract rate is 9%,and interest is paid semiannually on June 30 and December 31.The market rate is 8% and the bonds are sold for $312,177.
-The journal entry to record the first interest payment using the effective interest method of amortization is:

Question

Quizplus · Accepted Answer

Under the effective interest method of amortization, the interest expense for each period is calculated as the carrying value of the bonds multiplied by the effective interest rate. In this case, the effective interest rate is given as 8%, which is lower than the contract rate of 9%. This means that the bonds were sold at a premium, so the premium on bonds payable must be amortized over the life of the bonds.

The semiannual interest payment can be calculated as follows:
Par value x Contract rate x Time = $300,000 x 9% x 6/12 = $13,500

The effective interest rate can be calculated as follows:
PV of interest payments / PV of bond = $13,500 / $312,177 = 4.324%

To calculate the amortization of the premium on bonds payable for the first interest payment, we need to subtract the interest expense from the interest payment:
Premium on Bonds Payable - Bond Interest Expense = Premium Amortization
$12,712.92 - $12,487.08 = $225.84

Therefore, the journal entry to record the first interest payment using the effective interest method of amortization is:
Debit Bond Interest Expense $12,487.08
Debit Premium on Bonds Payable $225.84
Credit Cash $13,500.00

On January 1,a Company Issues Bonds Dated January 1 with a Par