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9 May, 09:52

On January 1, Year 1, a company issues $320,000 of 8% bonds, due in 15 years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 7%, the bonds will issue at $349,428.

Required:

Record the bond issue on January 1, Year 1, and the first two semiannual interest payments on June 30, Year 1, and December 31, Year 1.

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  1. 9 May, 10:07
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    Answer with its Explanation:

    At the issuance date, the bond the double entry would be as under:

    Dr Cash $349,428

    Cr Bonds payable $320,000

    Cr Premium on Bonds payable $29,428

    At June 30,2021, semi annual interest payment date, the double entry would be:

    Dr Interest expense $12,230 ($349,428 * 7% * 6/12)

    Dr Premium on Bonds payable $570

    Cr Cash $12,800 (320,000 * 8% * 6/12)

    Now at the end of the first six months, the carrying value of the bond would decrease by $570 ($349,428*8% * 6/12 - $320,000*7% * 6/12) to $348,858.

    Now at December 31,2021, the next semi annual interest payment date, the double entry on this date would be:

    Dr Interest expense $12,210 ($348,858 * 7% * 6/12)

    Dr Premium on Bonds payable $590

    Cr Cash $12,800 ($320,000 * 8% * 6/12)

    Now at the end of the first six months, the carrying value of the bond would decrease by $590 ($348,858*8% * 6/12 - $320,000*7% * 6/12) to $348,268.
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