Rko company sold bonds with a face value of $850,000 for $910,000. the bonds have a coupon rate of 8 percent, mature in 10 years, and pay interest annually every december 31. all of the bonds were sold on january 1 of this year. using a premium account, record the sale of the bonds on january 1 and the payment of interest on december 31 of this year. rko uses the effective-interest amortization method. assume an annual market rate of interest of 7 percent.

cash                910,000 debit

  bonds payable                 850,000 credit

  premium on BP                  60,000 credit

-- to record issuance of bonds --

interest expense63700 debit

amortization                 4300 credit

cash                       68000 credit

--to record coupon payment at December 31th--

Explanation:

issuance:

cash proceed of 910,000 face value of 850,000 the 60,000 difference wil be a premium.

interest entry:

we multiply the carrying value of the bonds by the market rate

we calcualte the cash procees as ussual: face value x bond rate

the difference wil be the amortization on premium

910,000 x 7%  63,700

850,000 x 8% 68,000

amorization       4,300

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