JournaldrillInterest with effective-interest premium
A journal entry exercise from Journaldrill. Solve it with an account picker and debit and credit fields in your browser, and it is checked the moment you submit.
The task
On January 1, Halcyon Software issued $500,000 of 5-year, 8% bonds when the market rate was 6%. Interest is paid semiannually, and the bonds were issued at a carrying value of $542,651.01. Using the effective-interest method, record the first interest payment on June 30.
What this exercise teaches
Interest expense is $542,651.01 x 6% x 6/12 = $16,279.53 and cash paid is $500,000 x 8% x 6/12 = $20,000. Premium amortization is $20,000 - $16,279.53 = $3,720.47.
A hint if you get stuck
Expense is the market rate times carrying value, cash is the stated rate times face value, and the difference reduces the premium.
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