McCool Corporation wholesales repair products to equipment manufacturers. On Apr
ID: 2370229 • Letter: M
Question
McCool Corporation wholesales repair products to equipment manufacturers. On April 1, 2012, McCool Corporation issued $30,000,000 of five-year, 10% bonds at a market (effective) interest rate of 8%, receiving cash of $32,446,500. Interest is payable semiannually on April 1 and October 1.
b. Journalize the entry to record the first interest payment on October 1, 2012, and amortization of bond premium for six months, using the straight-line method. (Round to the nearest dollar.) For a compound transaction, if an amount box does not require an entry, leave it blank or enter "0".
Explanation / Answer
The CR to Cash for each interest payment is always:
face amount of bonds x bond stated rate (not the market rate) x 1/2 (since the payments are semiannual)
2) The DR to Premium on Bonds Payable under the straight-line method is always:
total premium / number of years x 1/2 (again, since this is a semi-annual payment). The total premium is the difference between the cash received from the sale less the face amount of the bonds
3) The DR to Interest Expense is the difference between 1) and 2) above