Polk incorporated issued $450,000 of 13% bonds on July 1, 2013,for $465,303.59.
ID: 2482382 • Letter: P
Question
Polk incorporated issued $450,000 of 13% bonds on July 1, 2013,for $465,303.59. The bonds were dated January 1, 2013, pay interest on each June 30, and December 31, are due December 31, 2017, and were issued to yield 12%. Polk uses the effective interest method of amortization.
Prepare the journal entries to record the issue of the bonds on July, 2013, and the interest payments on December 31, 2013, and June 30, 2014. If an amount box does not require an entry, leave it blank. Round your answers to two decimal places, if necessary.
Explanation / Answer
Entry for Issue of Bond:
Cash Dr $465,303.59
To Bond Payable $450,000.00
To Premium on issue of bond $65,303.59
(Bond issued at premium)
Entry on December 31,2013:
Interest Expense Dr $27918.22
Premium on issue of bond Dr $1331.78
To Cash $29250
(Interest paid in December 2013)
Entry on June 30,2014:
Interest Expense Dr $27838.31
Premium on issue of bond Dr $1411.69
To Cash $29250
(Interest paid in June 2014)
Interest to be paid in cash = $450000 * 13% * 1/2 = $29250
Using effective interest method:
Interest expense = Market rate * opening book value of bond
As on Dec 31, interset expense = $465,303.59 * 12% * 1/2 = $27918.22
The difference between cash paid and interest expense is amortized premium i.e. 29250 - 27918.22 = $1331.78
As on June 30 2014, interset expense = $(465,303.59-1331.78) * 12% * 1/2 = $27838.31
The difference between cash paid and interest expense is amortized premium i.e. 29250 - 27838.31 = $1411.69