On January 1, 2018, a company issues 3-year bonds with a face value of $50,000 and a stated interest rate of 7%. Because the market interest rate is 5%, the company receives $52,723 for the bonds.Required:Part a. Determine the interest expense, the cash payment for interest, and the amount of the premium that will be amortized during the year ending December 31, 2018.Part b. Prepare the journal entry to record the first interest payment on December 31, 2018.
What will be an ideal response?
Part a
Interest expense = Carrying value × Market interest rate × Time
= $52,723 × 0.05 = $2,636.15
Cash payment for interest = Face value × Stated interest rate × Time
= $50,000 × 0.07 = $3,500
Amortization of premium = Cash payment for interest - Interest expense
= $3,500 - $2,636.15 = $863.85
Part b
| Interest Expense | 2,636.15 | ? |
| Premium on Bonds Payable | 863.85 | ? |
| Cash | ? | 3,500 |
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