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Exercise 14-6 (Algo) Bonds; issuance; effective interest [LO14-2] The Gorman Group issued $900,000 of 11% bonds on June 30, 2021, for $977,220. The bonds were dated on June 30 and mature on June 30, 2041 (20 years). The market yield for bonds of similar risk and maturity is 10%. Interest is paid semiannually on December 31 and June 30. Required: 1. to 3. Prepare the journal entries to record their issuance by The Gorman Group on June 30, 2021, interest on December 31, 2021 and interest on June 30, 2022 (at the effective rate).

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Answer:

1) June 30, 2021, bonds are issued at a premium.

Dr Cash 977,220

    Cr Bonds payable 900,000

    Cr Premium on bonds payable 77,220

2) December 31, 2021, first coupon payment

Dr Interest expense 48,861

Dr Premium on bonds payable 639

    Cr Cash 49,500

amortization of premium on bonds payable = (977,220 x 5%) - 49,500 = -639

3) June 30, 2022, second coupon payment

Dr Interest expense 48,829

Dr Premium on bonds payable 671

    Cr Cash 49,500

amortization of premium on bonds payable = (976,581 x 5%) - 49,500 = -670.95 ≈ -671