A Company Issued 10%, 5-Year Bonds with a Par Value

question 28

Essay

A company issued 10%, 5-year bonds with a par value of $2,000,000, on January 1, 2010. Interest is to be paid semiannually each June 30 and December 31. The bonds were sold at $2,162,290 to yield the buyers an 8% annual return. The company uses the effective interest method of amortization.
(1) Prepare an amortization table for the first two semiannual payment periods using the format shown below.
$$\begin{array} { | c | c | c | c | c | c | } \hline \begin{array} { c } \text { Semiannual } \\\text { Interest } \\\text { Period }\end{array} & \begin{array} { c } \text { Cash Interest } \\\text { Paid }\end{array} & \begin{array} { c } \text { Bond Interest } \\\text { Expense }\end{array} & \begin{array} { c } \text { Premium } \\\text { Amortization }\end{array} & \begin{array} { c } \text { Unamortized } \\\text { Premium }\end{array} & \begin{array} { c } \text { Carrying } \\\text { Value }\end{array} \\\hline\end{array}$$
(2) Prepare the general journal entry to record the first semiannual interest payment.

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Definitions:

Economic Profit

The difference between the total revenue received from the sale of an output and the total opportunity costs of the inputs used.

Economic Losses

Monetary losses incurred from business operations or other economic activities, often delineated from accounting losses.

Positive Profit

A financial gain that occurs when the revenues earned exceed the costs incurred.

Production Level

The quantity of goods or services that a firm or economy produces within a given time period.