The Gorman Group issued $860,000 of 9% bonds on June 30, 2013, for $945,110. The

Question

The Gorman Group issued $860,000 of 9% bonds on June 30, 2013, for $945,110. The bonds were dated on June 30 and mature on June 30, 2033 (20 years). The market yield for bonds of similar risk and maturity is 8%. Interest is paid semiannually on December 31 and June 30.

Required:
Complete the below table to record the company's journal entry. (Enter interest rate to 1 decimal place.)

1. Prepare the journal entry to record their issuance by The Gorman Group on June 30, 2013. (If no entry is required for a transaction, select "No journal entry required" in the first account field.)

2. Prepare the journal entry to record interest on December 31, 2013 (at the effective rate). (If no entry is required for a transaction, select "No journal entry required" in the first account field.)

3. Prepare the journal entry to record interest on June 30, 2014 (at the effective rate). (If no entry is required for a transaction, select "No journal entry required" in the first account field.)

December 31, 2013 Amount Interest Rate Total Interest expense x = Cash x = Amortization of premium on bonds $0 June 30, 2014 Amount Interest Rate Total Interest expense x = Cash x = Amortization of premium on bonds $0

Explanation / Answer

Explanation and calculations: 4% = 8%/2 and 4.5% = 9%/2 (as interests are paid semiannually)

Outstanding balance on 30th June 2013 = $945,110

cash interest @4.5% on 860,000 = 34,400. effective interest = 4% of balance = 4.5% of 945,110 = 37,804. amortization of premium = 38700-37804 = 896.

outstanding balance on 31st december = 945110-896 = $944,214

Journal entries:

1. Cash (Dr) $945,110

Bonds payable (Cr) $860,000

Premium on bonds payable (Cr) $85,110

(premium = total amount - face value)

2. Interest expense (Dr) $37,804

Premium on bonds payable (Cr) $896

Cash (Cr) $38,700

(Outstanding balance on 30th June 2013 = $945,110

cash interest @4.5% on 860,000 = 34,400. effective interest = 4% of balance = 4.5% of 945,110 = 37,804. amortization of premium = 38700-37804 = 896.)

3. Interest expense (Dr) $37,769

Premium on bonds payable (Cr) $931

Cash (Cr) $38,700

(outstanding balance = previous balance - amortization of premium = 945,110 - 896 = $944,214. cash interest = 4.5% of 860,000 = 34400. effective interest = 4% of balance = 4% of 944214 = 37769)

31-Dec-13 Amount Interest rate Total Interest expense 945,110 x 4% = 37,804.40 Cash 860,000 x 4.50% = 38,700.00 Amortization of premium on bonds 896.00 30-Jun-14 Interest expense 944,214 x 4% = 37,768.56 Cash 860,000 x 4.50% = 34,400.00 Amortization of premium on bonds 931.00

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