ACCT 1000/2210 Module 9 - Class Presentation

9-4B – Bond Issued at a Premium

On January 31, 2024, Bandit Inc. issues a $100,000 10-year 5% bond. The market rate of interest
is 4.5%. Because the market rate is lower than the bond rate, the bonds issue at a premium. The
bond quote is: 103.991. The bonds pay interest semi-annually on January 31 and July 31. The
company’s fiscal-year end is December 31.

Required

a.) Prepare a bond amortization schedule for the issuance and the first two interest periods.
b.) Record the journal entry required on:
i. The issuance of the bond. (January 31, 2024)
ii. The first interest payment. (July 31, 2024)
iii. The company’s fiscal year-end. (December 31, 2024)
iv. The second interest payment. (July 31, 2025)

SOLUTION
9-4B – Bond Issued at a Premium
a)

Maturity value = $100,000 (face value)

Bond quote = 103.991% of face value
Face Value * Bond quote = Paid for Bond
$100,000 * 103.991% = $103,991
Interest payment = 5%/2 = 2.5% (company promised – semi-annual)
Interest expense = 4.5%/2 = 2.25%

Semi-annual Interest Interest Premium Premium Bond

interest payment * expense ** amortization *** **** carrying
period amount
*****
Jan 31, 2024 0 0 0 3,991 103,991
Jul 31, 2024 2,500 2,340 160 3,831 103,831
Jan 31, 2025 2,500 2,336 164 3,667 103,667

(*) Interest payment multiplied by maturity value

(**) Interest expense multiplied by preceding bond carrying amount
(***) Interest payment minus interest expense
(****) Preceding premium minus premium amortization
(*****) Maturity value plus premium
ACCT 1000/2210 Module 9 - Class Presentation

b)
i)
Jan 31, 2024 Debit Credit
DR Cash 103,991
CR Premium 3,991
CR Bond Payable 100,000

ii)
July 31, 2024 Debit Credit
DR Interest expense 2,340
DR Premium 160
CR Cash 2,500

iii)
Dec 31, 2024 Debit Credit
DR Interest expense 1,947
DR Premium 137
CR Interest payable 2,084

iv)
Jan 31, 2025 Debit Credit
DR Interest expense 389
DR Premium 27
DR Interest payable 2,084
CR Cash 2,500