Question

Hallmark company issued at 2,000,000 bond on January 1, 2014. The bond was dated January 1, 2014 had an 8% stated rate, pays interest annually on December 31, and sold for $2,200,600 at a time when the market rate of interest was 6%. Hallmark uses the effective-interest method to account for its bonds.

Prepare the necessary journal entry for each of the following dates:

January 1, 2014

December 31, 2014

December 31, 2015

Answer 1

Face Value of Bonds = $2,000,000
Issue Value of Bonds = $2,200,600

Premium on Bonds = Issue Value of Bonds - Face Value of Bonds
Premium on Bonds = $2,200,600 - $2,000,000
Premium on Bonds = $200,600

Annual Coupon Rate = 8.00%
Annual Coupon = 8.00% * $2,000,000
Annual Coupon = $160,000

Annual Interest Rate = 8.00%

Amortization Table for first 2 interest payments is:

Unamortized Interest Premium Cash Paid Carrying Value Date Amortized Expense Premium 200,600 $ 172,636 $ 142,994 $ Jan. 01, 2014 2,200,600 Dec. 31, 2014$ Dec. 31, 2015 $ 160,000 $ 160,000 $ 132,036 $ 130,358 $ 27,964 $ 29,642 $ 2,172,636 2,142,994

Journal entries to record issuance of bonds and first 2 payments of interest are:

General Journal Debit Credit Date $ Cash Jan. 01, 2014 2,200,600 Bonds Payable $ 2,000,000 Premium on Bonds Payable 200,600 Dec. 31, 2014 Interest Expense $ 132,036 Premium on Bonds Payable 27,964 160,000 Cash Dec. 31, 2015 Interest Expense $ 130,358 Premium on Bonds Payable $ 29,642 Cash 160,000