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Exercise 8: Complete the following problem. A $20,000, 2 year, 10% (Stated rate) bond is sold when the Effective (Market) rate is 8%. The bond
Exercise 8: Complete the following problem. A $20,000, 2 year, 10% (Stated rate) bond is sold when the Effective (Market) rate is 8%. The bond pays interest semi-annually. Assuming a price of 104 at issuance record the following. 1. Entry required upon issuance of the bond. Cash proceeds: $ X $ 2. Entry on the first interest payment date. Use STRAIGHT-LINE method for amortization. a. Actual Interest payment $ % x 6/12 = $ b. Amortization of the Premium using the STRAIGHT-LINE method. $ / periods= $ 3. Entry on the second interest payment date. Use STRAIGHT-LINE method for amortization. a. Actual Interest payment b. Amortization of the Premium using the STRAIGHT-LINE method. Premium on Bonds Payable Cash Bonds Payable Interest Expense TTTT Next, use the t-accounts below the table to repeat the same three steps (from above) but this time use the EFFECTIVE INTEREST RATE METHOD. Round any calculations to the nearest dollar. C D E 10% x $20K 12 Interest Paid (D-C) Interest Pymt 8% x Col.E I 2 Interest Expense (B - A) Premium Amortization Premium Balance 800 ($20K + D) Carrying Amount 20,800 1 2 Premium on Bonds Payable Cash Bonds Payable Interest Expense T
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