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19 June, 18:05

RKO Company sold bonds with a face value of $850,000 for $910,000. The bonds have a coupon rate of 8 percent, mature in 10 years, and pay interest annually every December 31. All of the bonds were sold on January 1 of this year. Using a premium account, record the sale of the bonds on January 1 and the payment of interest on December 31 of this year. RKO uses the effective-interest amortization method. Assume an annual market rate of interest of 7 percent.

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  1. 19 June, 18:25
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    cash 910,000 debit

    bonds payable 850,000 credit

    premium on BP 60,000 credit

    - - to record issuance of bonds - -

    interest expense 63700 debit

    amortization 4300 credit

    cash 68000 credit

    --to record coupon payment at December 31th--

    Explanation:

    issuance:

    cash proceed of 910,000 face value of 850,000 the 60,000 difference wil be a premium.

    interest entry:

    we multiply the carrying value of the bonds by the market rate

    we calcualte the cash procees as ussual: face value x bond rate

    the difference wil be the amortization on premium

    910,000 x 7% 63,700

    850,000 x 8% 68,000

    amorization 4,300
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Home » Business » RKO Company sold bonds with a face value of $850,000 for $910,000. The bonds have a coupon rate of 8 percent, mature in 10 years, and pay interest annually every December 31. All of the bonds were sold on January 1 of this year.
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