Question

On December 31, 2019, when the market rate was 12%, Drum Corp issued $2,000,000, 14%, 5-year bonds. Interest is payable semi-annually on June 30 and December 31. The bonds were issued for $2,147,214, and the corporation uses the effective interest method of amortizing bond premium or discount.

Required

1. Prepare the amortisation table

2. Prepare the journal entries to record the issuance of the bonds and the first interest payment

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Answer #1

1.

Cash Payment of Interest Interest Expense Amortization of Premium End Bal
$       21,47,214
1 $        1,40,000 $         1,28,833 $                 11,167 $       21,36,047
2 $        1,40,000 $         1,28,163 $                 11,837 $       21,24,210
3 $        1,40,000 $         1,27,453 $                 12,547 $       21,11,663
4 $        1,40,000 $         1,26,700 $                 13,300 $       20,98,363
5 $        1,40,000 $         1,25,902 $                 14,098 $       20,84,265
6 $        1,40,000 $         1,25,056 $                 14,944 $       20,69,321
7 $        1,40,000 $         1,24,159 $                 15,841 $       20,53,480
8 $        1,40,000 $         1,23,209 $                 16,791 $       20,36,689
9 $        1,40,000 $         1,22,201 $                 17,799 $       20,18,890
10 $        1,40,000 $         1,21,110 $                 18,890 $       20,00,000

2.

Date Account Titles Debit Credit
Dec-31 Cash $      21,47,214
       Bonds Payable $       20,00,000
       Premium on Bonds Payable $         1,47,214
(Issue of Bonds at premium)
Jun-30 Interest Expense $        1,28,833
Premium on Bonds Payable $           11,167
       Cash $         1,40,000
(Payment of interest)
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