How do you record the issuance of bonds?

Accounting question dealing with bonds issuance and effective rate?

• B group issued $900,000 of 13% bonds on 6/30/2011 for $967,707. the bonds were dated on 06/30 and matures 06/30/2031 [20yrs]. the market rate is 12%. Interest paid semiannually on Dec 31 and June 30. Need journal entries to record @ bond issuance by B group and also record interest on 12/31/2011 & 06/30/2012. please show the calculations.

• Answer:

  bond issuance by B group The bonds were issued for more than the face value amount, so they were issued at a premium. Dr Cash 967,707 Cr Bonds Payable 900,000 Cr Premium on Bonds Payable 67,707 and also record interest on 12/31/2011 Cash payment will be the same every period. (900,000 x 13%) / 2 = 58,500 Face value + unamortized premium = carrying value of bonds. So for the first payment the carrying value is $967,707 (967,707 x 12% market rate) / 2 = 58,062 interest expense 58,500 - 58,062 = 438 premium amortization Dr Interest Expense 58,062 Dr Premium on Bonds Payable 438 Cr Cash 58,500 *Carrying value of the bonds is now 967,707 - 438 = 967,269 & 06/30/2012. (967,269 x 12%) / 2 = 58,036 interest expense 58,500 - 58,036 = 464 premium amortization Dr Interest Expense 58,036 Dr Premium on Bonds Payable 464 Cr Cash 58,500