Chapter 14, Problem 3APSA

To determine

  $\begin{array}{l}PremiumonBondsPayable=Issuepriceofthebond–Parvalueofthebond\hfill \\ =\$332,988-\$320,000\hfill \\ \begin{array}{l} =\$12,988\\ \\ Straight-LinePremiumAmortization=\frac{PremiumonBondsPayable}{NumberofInterestPeriod}\\ =\frac{\$12,988}{10periods}\\ =\$1,299perperiod\end{array}\hfill \end{array}$

Issue of bond at premium:

When the coupon rate or contract rate of a bond is higher than the market interest rate, the bond is being issued at premium. If the bond is issued at premium, the selling price of the bond will be higher than the face value of the bond.

Straight Line Method Amortization of premium:

Under straight line amortization method, a specific amount of premium is amortized each period till its maturity period. The period ending amortization amount is computed by dividing the total premium by the number of periods in maturity of the bonds payable.

To determine:

1. Preparation of journal entry to record the bond’s issuance.

2. Computation of (a) the cash payment, (b) the straight-line premium amortization, and (c) the bond interest expense

3. Determine to total bond interest expense to be recognized over the life of the bonds.

4. Prepare the first two years of an amortization table using straight-line method.

5. Prepare the journal entries to record the first two interest payments.

Answer to Problem 3APSA

Solution:

1.

Date	Accounts	Debit	Credit
2015
Jan. 1	Cash	$4,895,980
	Bonds Payable		$4,000,000
	Premium on Bonds Payable		$895,980

2.

Semiannual Period	Amount
Cash Payment	$120,000
Straight-line discount amortization	$29,866
Bond Interest Expense	$149,866

3.

The total bond interest expense to be recognized over the bond’s life is $2,704,020.

4.

Period Ending	Unamortized Premium	Carrying Value
01/1/2015	$895,980	$4,895,980
06/30/2015	$866,114	$4,866,114
12/31/2015	$836,248	$4,836,248
06/30/2016	$806,382	$4,806,382
12/31/2016	$776,516	$4,776,516

5.

Date	General Journal	Debit	Credit
2015
Jun. 30	Interest Expense	$90,134
	Premium on Bonds Payable	$29,866
	Cash		$120,000
Dec. 31	Interest Expense	$90,134
	Premium on Bonds Payable	$29,866
	Cash		$120,000

Explanation of Solution

Explanation:

1. Computation of discount on bonds payable

2. Computation of cash payment, straight-line discount amortization, and the bond interest expense

3.

Computation of total interest expense
Amount to be repaid at maturity:
Total Interest Payment	$3,600,000
Par Value of Bonds	$4,000,000
Total amount to be repaid	$7,600,000
Less : Selling Price of the Bonds	$4,895,980
Total Bond Interest Expense	$2,704,020

4. The premium amortization amount of $29,866 deducted from both the unamortized premium column and carrying value of the bonds payable for every semiannual period.

5. Under straight line premium amortization, the same amount of interest expense, discount amortized and interest payment is recorded till the maturity of the bonds.

Conclusion

Conclusion:

The discount amortization for every semiannual period is $29,866 and carrying value of the bonds payable for the year ended December 31, 2016 is $4,776,516.