Question

required information
problem 14 - 11ab (static) effective interest: amortization of bond lo p5
the following information applies to the questions displayed below.
ike issues $180,000 of 11%, three - year bonds dated january 1, 2021, that pay interest semiannually on june 30 and
december 31. they are issued at $184,566 when the market rate is 10%.
problem 14 - 11ab (static) part 4

1. prepare the journal entries to record the first two interest payments.

view transaction list
journal entry worksheet
1 2
record the first interest payment on june 30.
note: enter debits before credits.

Explanation:

Step1: Calculate the cash interest payment

The cash interest payment is calculated as:
$$\text{Face value of bonds}\times\text{Stated interest rate}\times\frac{\text{Time period}}{12}$$
$$\$180,000\times 11\%\times\frac{6}{12}=\$9,900$$

Step2: Calculate the interest expense for the first period

The interest expense is calculated as:
$$\text{Carrying value of bonds}\times\text{Market interest rate}\times\frac{\text{Time period}}{12}$$
$$\$184,566\times 10\%\times\frac{6}{12}=\$9,228.3$$

Step3: Calculate the premium amortization for the first period

Premium amortization = Cash interest - Interest expense
$$\$9,900 - \$9,228.3=\$671.7$$

Step4: Prepare the journal entry for the first interest payment (June 30)

Debit Interest Expense ($\$9,228.3$), debit Premium on Bonds Payable ($\$671.7$), credit Cash ($\$9,900$)

Step5: Calculate the carrying value of bonds after first payment

Carrying value = Previous carrying value - Premium amortization
$$\$184,566-\$671.7 = \$183,894.3$$

Step6: Calculate the interest expense for the second period

$$\$183,894.3\times 10\%\times\frac{6}{12}=\$9,194.72$$

Step7: Calculate the premium amortization for the second period

Premium amortization = Cash interest - Interest expense
$$\$9,900-\$9,194.72=\$705.28$$

Step8: Prepare the journal entry for the second interest payment (December 31)

Debit Interest Expense ($\$9,194.72$), debit Premium on Bonds Payable ($\$705.28$), credit Cash ($\$9,900$)

Answer:

June 30, 2021

Account Title	Debit	Credit
Premium on Bonds Payable	$\$671.7$
Cash		$\$9,900$

December 31, 2021

Account Title	Debit	Credit
Premium on Bonds Payable	$\$705.28$
Cash		$\$9,900$