Question

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ike issues $240,000 of 11%, three - year bonds dated january 1, 2021, that pay interest semiannually on june 30 and
december 31. they are issued at $246,087 when the market rate is 10%.

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

journal entry worksheet
1 2
record the first interest payment on june 30.
note: enter debits before credits.
date general journal debit credit
june 30

Explanation:

Step1: Calculate the cash interest payment

The cash interest payment is calculated as:
$$\text{Face value}\times\text{Coupon rate}\times\frac{\text{Time period}}{12}$$
For a $\$240,000$ face - value bond with an $11\%$ annual coupon rate and a semi - annual payment (6 - month period):
$$\$240,000\times11\%\times\frac{6}{12}=\$13,200$$

Step2: Calculate the interest expense for the first payment (June 30)

The bond is issued at $\$246,087$ and the market rate is $10\%$ (semi - annual market rate $r = 10\%\div2=5\%$)
The interest expense is calculated as:
$$\text{Carrying value}\times\text{Semi - annual market rate}$$
$$\$246,087\times5\%=\$12,304.35$$
The premium amortization for the first payment is:
$$\text{Cash interest}-\text{Interest expense}=\$13,200 - \$12,304.35=\$895.65$$
The journal entry for June 30 is:

Date	General Journal	Debit	Credit
	Premium on Bonds Payable	$\$895.65$
	Cash		$\$13,200$

Step3: Calculate the carrying value after the first payment

The carrying value after the first payment is:
$$\text{Initial carrying value}-\text{Premium amortization}$$
$$\$246,087-\$895.65=\$245,191.35$$

Step4: Calculate the interest expense for the second payment (December 31)

Using the new carrying value of $\$245,191.35$ and a semi - annual market rate of $5\%$
The interest expense is:
$$\$245,191.35\times5\%=\$12,259.57$$
The premium amortization for the second payment is:
$$\$13,200-\$12,259.57=\$940.43$$
The journal entry for December 31 is:

Date	General Journal	Debit	Credit
	Premium on Bonds Payable	$\$940.43$
	Cash		$\$13,200$

Answer:

For June 30:

Date	General Journal	Debit	Credit
	Premium on Bonds Payable	$\$895.65$
	Cash		$\$13,200$

For December 31:

Date	General Journal	Debit	Credit
	Premium on Bonds Payable	$\$940.43$
	Cash		$\$13,200$