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20 August, 10:02

On January 1, 2020, Tamarisk Corporation issued $700,000 of 9% bonds, due in 8 years. The bonds were issued for $740,784, and pay interest each July 1 and January 1. The effective-interest rate is 8%.

Required:

1. Prepare the company's journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry. Tamarisk uses the effective-interest method. (Round intermediate calculations to 6 decimal places, e. g. 1.251247 and final answer to 0 decimal places, e. g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.

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  1. 20 August, 10:17
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    Cash 740,783 debit

    Bonds payable 700,000 credit

    Premium ob BP 40,783 credit

    --to record issuance--

    Interest expense 29,631.32 debit

    premium on BP 1,868.68 debit

    cash 31,500 credit

    --to reocrd first interest payment--

    Interest expense 29,556.57 debit

    premium on BP 1,943.43 debit

    interest payable 31,500 credit

    --to record accrued interest at year-end on BP--

    Explanation:

    procceds 740,783

    face value 700,000

    premium on bonds payable 40,783

    When comparing, the firm received more than the face value hence, there is a premium on the bonds as the coupon payment are above the market rate.

    Now, the interest will be calculate as follow:

    carrying value x market rate:

    740,783 x 0.08/2 = 29,631.32 interest expense

    cash outlay:

    700,000 x 0.09/2 = 31,500

    amortization on premium (difference) 1,868.68

    new carrying value: 740,783 - 1,868,68 = 738,914

    second payment accrual:

    738,914 x 0.04 = 29,556.57

    cash outlay 31500

    amortization 1,943.43
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