THREE YEAR BOND ISSUED AT A PREMIUM - EFFECTIVE INTEREST AMORTIZATION Three different approaches to calculate the price of the bond.Shaded green. Amortization table. Shaded yellowy-orange. Journal entries. Shaded blue. Semi-annual payments Principal $800,000 Stated rate12% Market rate10% Tenor (years)3 Pricing ACCOUNTING - Effective Interest method Time periodCash paidPresent valuePV formulaDate1$48,000 $45,714$45,7141/1/2020$840,606 2$48,000 $43,537$43,5376/30/2020$48,000 $42,030 $5,970 $834,636 3$48,000 $41,464$41,46412/31/2020$48,000 $41,732 $6,268 $828,368 4$48,000 $39,490$39,4906/30/2021$48,000 $41,418 $6,582 $821,786 5$48,000 $37,609$37,60912/31/2021$48,000 $41,089 $6,911 $814,875 6$848,000 $632,791$632,7916/30/2022$48,000 $40,744 $7,256 $807,619 $840,606$840,60612/31/2022$48,000 $40,381 $7,619 $800,000 Using PV formula$840,606 The issue pricewas $840,606 JOURNAL ENTRIES DrCr Journal entry June 30?Issue dateCash$840,606 Premium on Bonds Payable$40,606On January 1, 2020, ShermanIndustries issued $800,000 of 12% bonds, dated January 1. Interest is payable semiannually on June 30 and December 31. The bonds mature in three years. The market yield for bonds of similar risk and maturity is 10%. Cash interestpaidInterestexpensePremiumamortizedCarrying amount value the bond as the sum of the present value of principal plus the present value of the interest. Show your work and comments below
Dr.Interest Expense ($840,606*0.10*6/12)42,030Bonds payable$800,000 Dr. Premium on bonds payable($48,000-42,030)5,970To record issuance of bonds payable at discount. Cr. Cash ($800,000*0.12*6/12)48,000 6/30/2020 Interest expense$42,030 Premium on Bonds Payable$5,970 Cash$48,000 12/31/2020 Interest expense$41,732 Premium on Bonds Payable$6,268 Cash$48,000 6/30/2021 Interest expense$41,418 Premium on Bonds Payable$6,582 Cash$48,000 12/31/2021 Interest expense$41,089 Premium on Bonds Payable$6,911 Cash$48,000 6/30/2022 Interest expense$40,744 Premium on Bonds Payable$7,256 Cash$48,000 12/31/2022 Interest expense$40,381 Premium on Bonds Payable$7,619 Cash$48,000 12/31/2022 Bonds payable$800,000 Cash$800,000
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