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Hillside issues $2,000,000 of 6%, 15-year bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. The bonds are issued at a price of $2,447,990.Required:a. Prepare the January 1, 2013, journal entry to record the bonds issuance.b. Prepare the first two years of an amortization table using the straight-line method.c. Prepare the journal entries to record the first two interest payments.

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Answer:

a.

Cash $2,447,990 (debit)

Investment in Bonds $2,447,990 (credit)

b.

Amortization Table for the first two years will be :

2013

Capital $22.307

Interest $97.693

Balance $2,425,683

2014

Capital $34,472

Interest $145,528

Balance $2,402,475

c.

First Payment : June 30, 2013

Interest Expense $48,957 (debit)

Investment in Bonds $11,043 (debit)

Cash $60,000 (credit)

Second Payment : December 31, 2013

Interest Expense $48,736 (debit)

Investment in Bonds $11,264 (debit)

Cash $60,000 (credit)

Explanation:

On the day of issuance of the Bonds, the entries will be :

Cash $2,447,990 (debit)

Investment in Bonds $2,447,990 (credit)

Use the data given to prepare an amortization schedule

Hint : First find the YTM as follows :

n = 15 × 2 = 30

FV = - $2,000,000

PV = $2,447,990

PMT = ($2,000,000 × 6%)/2 = $60,000

P/ yr = 2

YTM = ? 3.998

Using a financial calculator, the YTM is 3.998 or 4 %

Amortization Table for the first two years will be :

2013

Capital $22.307

Interest $97.693

Balance $2,425,683

2014

Capital $34,472

Interest $145,528

Balance $2,402,475

Journal Entries for the Payment of Interest :

First Payment : June 30, 2013

Interest Expense $48,957 (debit)

Investment in Bonds $11,043 (debit)

Cash $60,000 (credit)

Second Payment : December 31, 2013

Interest Expense $48,736 (debit)

Investment in Bonds $11,264 (debit)

Cash $60,000 (credit)

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