Appendix 1 and Appendix 2 PR 14-6A Bond premium, entries for bonds payable transactions, interest method of amortizing bond premium

Wishaw, Inc. produces and sells outdoor equipment. On July 1, 2014, Wishaw, Inc. issued $150,000,000 of 20-year, 12% bonds at a market (effective) interest rate of 9%, receiving cash of $191,403,720. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

Instructions

1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds.

2. Journalize the entries to record the following:

a. The first semiannual interest payment on December 31, 2014, and the amortization of the bond premium, using the interest method. (Round to the nearest dollar.)
b. The interest payment on June 30, 2015, and the amortization of the bond premium, using the interest method. (Round to the nearest dollar.)

3. Determine the total interest expense for 2014.


Answer:

1. 2014
July 1 Cash 191,403,720
Premium on Bonds Payable 41,403,720
Bonds Payable 150,000,000
2. a. 2014
Dec. 31 Interest Expense* 8,613,167
Premium on Bonds Payable 386,833
Cash 9,000,000
*$191,403,720 × 4.5%
b. 2015
June 30 Interest Expense* 8,595,760
Premium on Bonds Payable 404,240
Cash 9,000,000

*($191,403,720 – $386,833) × 4.5%
3. $8,613,167