Bond Issue On January 1, 2019, Lightfoot Corporation issues 10%, 5-year bonds with a face value of $275,000 when the effective interest rate is 9%. Interest is to be paid semiannually on June 30 and December 31. Required:
Prepare the journal entry to record the first interest payment on June 30, 2019.

Answer and Explanation:

Before recording the journal entry first we have to determine the following calculations

Semi Annual interest payment is

= $275,000 x 10% ×  6 ÷ 12

= $13,750

The Present value of principal is

= Par value of bonds × Present value factor (r%, n)

= $275,000 × Present value factor (4.5%, 10)

= $275,000 × 0.64393

= $177,080.75

Now Present value of interest is

= Interest × Present value annuity factor (r%, n)

= $13,750 × Present value annuity factor (4.5%, 10)

= $13,750 × 7.91272

= $108,799.90

Now  

The Selling price of bond is

= Present value of principal  + Present value of interest

= $177,080.75 + $108,799.9

= $285,881

Interest expense to be recorded is

= Carrying value of bonds × Effective interest rate × 6 ÷12

= $285,881 × 9% × 6 ÷ 12

= $12,865

And,  

The Premium on bonds payable is

= Semi annual interest payment - Interest expense

= $13,750 - $12,865

= $885

Now the journal entry is

Interest expense$12,865  

Premium on bonds payable$885  

         To Cash  $13,750

(Being the interest payment is recorded)

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