Question

Ellis issues 7.0%, five-year bonds dated January 1, 2017, with a $580,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $604,738. The annual market rate is 6% on the issue date.

Required:

1. Complete the below table to calculate the total bond interest expense over the bonds' life.
2. Prepare a straight-line amortization table for the bonds’ life.
3. Prepare the journal entries to record the first two interest payments.

Complete the below table to calculate the total bond interest expense over the bonds' life.

Total bond interest expense over life of bonds: Amount repaid: payments of: Par value at maturity: Total repaid: Less amount borrowed: Total bond interest expense:

Prepare a straight-line amortization table for the bonds’ life.

Semiannual Period-End Unamortized Premium Carrying Value 01/01/2017 06/30/2017 12/31/2017 06/30/2018 12/31/2018 06/30/2019 12/31/2019 06/30/2020 12/31/2020 06/30/2021 12/31/2021

Prepare the journal entries to record the first two interest payments.

• Record the first interest payment on June 30, 2017.

	Date General Journal Debit Credit Jun 30, 2017

• Record the second interest payment on December 31, 2017.

	Date General Journal Debit Credit Dec 31, 2017

Answer 1

• All working forms part of the answer
• Requirement 1

Amount Repaid:
10 [5 years x 2 semi annual payments = 10]	payments of	$                   20,300.00 [Interest = 580000 x 7% x 6/12]	$             203,000.00
Par Value at Maturity			$             580,000.00
Total Repayments			$             783,000.00
Less: Amount borrowed			$             604,738.00
Total Bond Interest Expenses			$             178,262.00

• Requirement 2

--Working

A	Issue Price	$604,738
B	Face Value	$580,000
C = A - B	Premium to be amortised	$24,738
D	NO. of Interest payments	10
E = C/D	Straight Line amortisation	$2,473.80

--Answer

Semiannual Period-End	Premium amortised	Unamortized Premium	Carrying Value
	[A] = Working column	[B = B - A]	[C = 580000 + B]
01-01-2017		$       24,738.00	$    604,738.00
06/30/2017	$                                      2,473.80	$       22,264.20	$    602,264.20
12/31/2017	$                                      2,473.80	$       19,790.40	$    599,790.40
06/30/2018	$                                      2,473.80	$       17,316.60	$    597,316.60
12/31/2018	$                                      2,473.80	$       14,842.80	$    594,842.80
06/30/2019	$                                      2,473.80	$       12,369.00	$    592,369.00
12/31/2019	$                                      2,473.80	$         9,895.20	$    589,895.20
06/30/2020	$                                      2,473.80	$         7,421.40	$    587,421.40
12/31/2020	$                                      2,473.80	$         4,947.60	$    584,947.60
06/30/2021	$                                      2,473.80	$        2,473.80	$    582,473.80
12/31/2021	$                                      2,473.80	$               0.00	$    580,000.00

• Requirement 3

Date	General Journal	Debit	Credit
Jun 30, 2017	Interest Expense	$           17,826.20
	Premium on Bonds Payable	$             2,473.80
	Cash		$         20,300.00
	[First interest payment]

Date	General Journal	Debit	Credit
Dec 31, 2017	Interest Expense	$           17,826.20
	Premium on Bonds Payable	$             2,473.80
	Cash		$         20,300.00
	[Second interest payment