Pretzelmania, Inc., issues 5%, 20-year bonds with a face amount of $56,000 for $63,660 on January 1, 2021. The market interest rate for bonds of similar risk and maturity is 4%. Interest is paid semiannually on June 30 and December 31.

1. & 2. Record the bond issue and first interest payment on June 30, 2021.

cash 63,660 debit

bonds payable 56,000 credit

premium on BP 7,660 credit

--to record issuance--

interest expense 1,273.5 debit

premiun on BP 318.3 debit

cash 1,591.5 credit

--to record June 30th 2021 interest payment--

Explanation:

the cash received will be debited while the bonds liabiltiy credit.

The difference as we receive above face value will be considered a premium and is a credited as well.

The interest expense will be the carrying value times market rate:

63,660 x 4% x 1/2 = 1,273.2

Then, we calculate the actual cash outlay:

63,660 x 5% x 1/2 = 1,591.5

The difference adjust the premium on BP : 1,591.5 - 1,273.2 = 318.3