On June 30, 2010, Mackes Company issued $5,040,000.00 face value of 13%, 20-year
ID: 2357128 • Letter: O
Question
On June 30, 2010, Mackes Company issued $5,040,000.00 face value of 13%, 20-year bonds at $5,419,156.68, a yield of 12%. Mackes uses the effective interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and December 31. (Round intermediate calculations and answers to 2 decimal places, e.g. 26,520.21. Use the rounded amounts in successive calculations. List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.)Prepare the journal entries to record the following transactions.
The issuance of the bonds on June 30, 2010.
The payment of interest and the amortization of the premium on December 31, 2010.
The payment of interest and the amortization of the premium on June 30, 2011.
The payment of interest and the amortization of the premium on December 31, 2011.
Explanation / Answer
The bonds are selling at a premium because the interest rate is greater than the market rate. The amount of cash interest paid is figured out using the bond’s interest rate times the face value of the note. This would be 5,040,000.00*.13*0.5 = $327,600. This number will stay the same.
The amount of interest expense is figured out using the bonds current carrying by the market interest rate. At the time of the first interest payment, this would be 5,419,156.68*.12*.5 = 325,149.40. Take the difference between this amount and the cash interest paid = 2450.60, and this is the amount that the premium gets amortized. This number will decrease as the premium is amortized.
Semi-annual period
Cash Interest paid
Bond interest expense
Premium amortization
Unamortized premium
Carrying value
379,156.68
5,419,156.68
6/30/2010-12/31/2010
327,600
325,149.40
2450.60
376,706.08
5,416,706.08
1/1/2011-6/30/2011
327,600
325,002.36
2597.64
374,108.44
5,414,108.44
6/30/2011-12/31/2011
327,600
324,846.51
2753.49
371,354.95
5,411,354.95
June 30, 2010:
Debit: Cash 5,419,156.68
Credit Bonds Payable 5,040,000
Credit: Premium on Bonds Payable 379,156.68
December 31, 2010:
Debit: Bond Interest Expense 325,149.40
Debit: Premium on Bonds Payable 2450.60
Credit: Cash 327,600
June 30, 2011:
Debit: Bond Interest Expense 325,002.36
Debit: Premium on Bonds Payable 2597.64
Credit: Cash 327,600
December 31, 2011:
Debit: Bonds Interest Expense 324,846.51
Debit: Premiums on Bonds Payable 2753.49
Credit: Cash 327,600
Semi-annual period
Cash Interest paid
Bond interest expense
Premium amortization
Unamortized premium
Carrying value
379,156.68
5,419,156.68
6/30/2010-12/31/2010
327,600
325,149.40
2450.60
376,706.08
5,416,706.08
1/1/2011-6/30/2011
327,600
325,002.36
2597.64
374,108.44
5,414,108.44
6/30/2011-12/31/2011
327,600
324,846.51
2753.49
371,354.95
5,411,354.95
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.