On July 1, 2010, Atwater Corporation issued $1,681,700 face value, 9%, 10-year b

Question

On July 1, 2010, Atwater Corporation issued $1,681,700 face value, 9%, 10-year bonds at $1,920,720. This price resulted in an effective-interest rate of 7% on the bonds. Atwater uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest July 1 and January 1.

Instructions
(Round all computations to 0 decimal places, e.g. 125. Use rounded amounts for future computations.)

Prepare the journal entry to record the issuance of the bonds on July 1, 2010. (For multiple debit/credit entries, list amounts from largest to smallest eg 10, 5, 3, 2.)

Explanation / Answer

Cash that will be paid Jan 1: 1,681,700*0.09*0.5 = 75,676.50 Interest expense recognized: 1,920,720*0.07*0.5 = 67,225.20 Amortization: 75,676.50 - 67,225.20 = 8,451.30 JOurnal entry: Debit: Interest expense 67,225.20 Debit: Premium on bonds payable 8,451.30 Credit: Bond interest payable 75,676.50

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