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 accrual of interest and the amortization of the premium on December 31, 2011. (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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