The Gorman Group issued $920,000 of 9% bonds on June 30, 2021, for $1,011,047. The bonds were dated on June 30 and mature on June 30, 2041 (20 years). The market yield for bonds of similar risk and maturity is 8%. Interest is paid semiannually on December 31 and June 30. Required: 1. to 3. Prepare the journal entries to record their issuance by The Gorman Group on June 30, 2021, interest on December 31, 2021 and interest on June 30, 2022 (at the effective rate).

Answer and Explanation:

The Journal entry is shown below:-

1. Cash Dr, $1,011,047

    To bonds payable $920,000

     To Premium issue of bonds $91,047

(Being Issue of bonds at premium is recorded)

2. The completion of the table is shown below:-

Dec 31, 2018        Amount          Interest rate       Total

Interest expense  $1,011,047        4%                 $40,441.8

                                                (8% × 6 ÷ 12)

Cash                       $920,000       4.5%               $41,400

                                                (9% × 6 ÷ 12)

Amortization of premium                                       $958.2

Interest expense Dr, $40,441.8

Premium issue of bonds Dr, $9,582

     To Cash $41,400

(Being interest expense and amortization of premium is recorded)

3. Dec 31, 2018        Amount          Interest rate       Total

Interest expense   $1,010,088            4%             $40,403.5

                ( $1,011,047 - $958.2)      (8% × 6 ÷ 12)

Cash                       $920,000       4.5%               $41,400

                                               (9% × 6 ÷ 12)

Amortization of premium                                       $996.5

Interest expense Dr, $40,403.5

Premium issue of bonds Dr, $995.5

     To Cash $41,400

(Being interest expense and amortization of premium is recorded)

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