Prepare the journal entries for December 31, 2021 and 2022.

Question

Charger Battery issued $200,000 of 11%, 7-year bonds on January 1, 2020, for $220,132. Interest is paid annually on December 31. The market rate of interest is 9%.

Prepare the journal entries for December 31, 2021 and 2022. If required, round your answers to the nearest whole dollar.

Answer 1

Because the bond was sold for more than than the stated rate, it is being sold for a premium. There are two ways of computing bond premium amortization 1)straight line 2)effective interest method. I'm going to assume the question is asking about effective interest method.

Our starting point is the credit entry of cash for 22,000 (that is the actual cash payment of 11% that the fact pattern says needs to be paid annually). We need to allocate the payment between interest expense and bond premium amortization. I created a bond premium amortization schedule to find out what to allocate to each portion. You can create your own effective interest allocation schedule by multiplying the carrying value by the market interest rate and subracting the cash payment. The difference is our amortization amount. You simply subtract the carrying value by the amortization amount to find the next years beginning carrying amount for the bond.

We can then fill in the journal entries as follows:

2021

Interest expense 19,615

Bond premium 2,385

Cash 22,000

2022

Interest expense 19,400

Bond premium 2,600

Cash 22,000