Chapter 14, Problem 3BPSB

To determine

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.