Pretzelmania, Inc., issues 5%, 20-year bonds with a face amount of $56,000 for $63,660 on January 1, 2021. The market interest rate for bonds of similar risk and maturity is 4%. Interest is paid semiannually on June 30 and December 31.

1. & 2. Record the bond issue and first interest payment on June 30, 2021.

Bond issue:

Dr cash     $63,660

Cr Bonds payable                    $56,000

Cr Premium on bonds payable $7,660

Interest payment:

Dr Interest expense                     $1,273.2

Dr Premium on bonds payable    $126.8

Cr  Cash                                                       $1,400

Explanation:

The bond issue brought about cash proceeds of $63,660 which implies that the bonds were issued at a premium  of $7660  ($63,660-$56,000) above the par value of $56,000.This means that cash account would be debited with $63,660 while bonds payable and premium on bonds payable would be credited with $56,000 and $7660 respectively.

The interest payment=$56,000*5%*6/12=$1400

interest expense=$63,660*4%*6/12=$1273.2

The premium amortization=interest payment -interest expense

                                           =$1400-$1273.2 =$126.8

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