I need help with the boxes with the 3 x\'s The Gorman Group issued $930,000 of 1
ID: 2332223 • Letter: I
Question
I need help with the boxes with the 3 x's
The Gorman Group issued $930,000 of 11% bonds on June 30, 2018, for $1,009,794. The bonds were dated on June 30 and mature on June 30, 2038 (20 years). The market yield for bonds of similar risk and maturity is 10%. Interest is paid semiannually on December 31 and June 30 Required: Complete the below table to record the company's journal entry 1. to 3. Prepare the journal entry to record their issuance by The Gorman Group on June 30, 2018, interest on December 31, 2018 and interest on June 30, 2019 (at the effective rate) December 31, 2018 Amount Total Interest expense Cash $ 1,009,794x $ 930,000x Interest Rate 5.0% 0.0% 50,490 S Amortization of premium on bonds (50,490) June 30, 2019 Amount Interest Rate 50% 0.0% Total Interest expense Cash $ 930,000x x $ 0 Amortization of premium on bondsExplanation / Answer
IN THE GIVEN CASE BONDS ARE ISSUED IN MARKET AT PREMIUM WITH HIGHER INTEREST RATE AS PREVAILING IN THE MARKET.
THUS THE EXTRA INTEREST CAUSED BY HIGHER INTEREST RATE SHOULD NOT BE DEBITED TO INTEREST EXPENSES, INSTEAD IT SHOULD BE CHARGED TO PREMIUM ON BONDS A/C AS AMORTIZATION OF PREMIUM ON BODS.
THIS IS CALLED EFFECTIVE INTEREST RATE METHODE OF BOND PREMIUM AMORTIZATION.
CALCULATION OF AMORTIZATION AMOUNT
= CASH INTEREST PAYABLE - EFFECTIVE INTEREST ON BOND BALANCE
CASH INTEREST PAYABLE
= FACE VALUE OF BONDS X ISSUE RATE OF INTEREST
EFFECTIVE INTEREST ON BOND BALANCE
= (FACE VALUE + PREMIUM BALANCE ) X MARKET INTEREST RATE
AS ON 31 DECEMBER, 2018
BOND FACE INTEREST RATE
= 11 % ANNUAL
=5.50 % SEMI ANNUAL
BOND MARKET INTEREST RATE
= 10 % ANNUAL
=5.00 % SEMI ANNUAL
BOND BALANCE
= FACE VALUE + PREMIUM BALANCE
= 930000 $ + 79794 $
= 1009794 $
AS ON 30 JUNE, 2019
BOND FACE INTEREST RATE
= 11 % ANNUAL
=5.50 % SEMI ANNUAL
BOND MARKET INTEREST RATE
= 10 % ANNUAL
=5.00 % SEMI ANNUAL
BOND BALANCE
= FACE VALUE + PREMIUM BALANCE
= 930000 $ + ( 79794 $ - 660 $ )
= 1009134 $ (# After write of premium in first Half Year )
JOURNAL ENTRY
AS ON 31 DECEMBER, 2018 AMOUNT RATE TOTAL INTEREST EXPENSES 1009794 X 5% = 50490 CASH PAYABLE 930000 X 5.50% = 51150 AMORTIZATION OF PREMIUM OF BONDS 660