Martinez Company issued $600,000 of 10%, 20-year bonds on January 1, 2014, at 102. Interest is payable semiannually on July 1 and January 1. Martinez Company uses the effective-interest method of amortization for bond premium or discount. Assume an effective yield of 9.7705%. Prepare the journal entries to record the following. (a) The issuance of the bonds. (b) The payment of interest and related amortization on July 1, 2014. (c) The accrual of interest and the related amortization on December 31, 2014.

The correct asnwer is : Journal entries

Bonds Payable 600,000

Cash: 600k6/1210%=30,000

Interest Payable 30,000

Explanation:

(a) Issuance of bonds:

Cash: 600k * 1.02 =612k

January 1st, 2014:

Cash 612,000

Premium on Bonds Payable 12,000

Bonds Payable 600,000

(b). Payment of interest and amortization:

Interest Expense: 612,0006/12.097705 = 29,897.73

Cash: 600k6/1210%  = 30,000

July 1st, 2014:

Interest Expense 29,897.73

Premium on Bonds Payable 102.27

Cash 30,000

(c). Accrual of interest and related amortization:

Interest Payable: 600k6/12.1=30,000

Interest expense: (612k-102.27)6/12.097705=29,892.73

December 31st, 2014:

Interest expense 29,892.73

Premium on Bonds Payable 107.27

Interest Payable 30,000

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