Question

Ripkin Company issues 9%, five-year bonds dated January 1, 2017, with a $320,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $332,988. Their annual market rate is 8% on the issue date.

Required

1. Calculate the total bond interest expense over the bonds’ life.

2. Prepare a straight-line amortization table like Exhibit 14.11 for the bonds’ life.

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

Answer 1

• All working forms part of the answer
• Requirement 1

Amount Repaid:
10 [5 years x 2 semi annual payments]	payments of	$                   14,400.00 [320000 x 9% x 6/12]	$             144,000.00
Par Value at Maturity			$             320,000.00
Total Repayments			$             464,000.00
Less: Amount borrowed			$             332,988.00
Total Bond Interest Expenses			$             131,012.00

Answer = $ 275,012

• Requirement 2

A	Issue price	$         332,988.00
B	Bonds Face Value	$         320,000.00
C = A - B	Premium on Bonds Payable	$           12,988.00
D	No. of payments of interest	10
E = C/D	Straight Line Amortisation	$             1,298.80

--AMORTIZATION TABLE

Period	Cash Interest	Premium Amortised	Interest Expense	Unamortised Premium	Carrying Value of Bond	Bonds Payable
Issue date				$          12,988.00	$        332,988.00	$       320,000.00
30-Jun-17	$                                    14,400.00	$             1,298.80	$          13,101.20	$          11,689.20	$        331,689.20	$       320,000.00
31-Dec-17	$                                    14,400.00	$             1,298.80	$          13,101.20	$          10,390.40	$        330,390.40	$       320,000.00
30-Jun-18	$                                    14,400.00	$             1,298.80	$          13,101.20	$            9,091.60	$        329,091.60	$       320,000.00
31-Dec-18	$                                    14,400.00	$             1,298.80	$          13,101.20	$            7,792.80	$        327,792.80	$       320,000.00
30-Jun-19	$                                    14,400.00	$             1,298.80	$          13,101.20	$            6,494.00	$        326,494.00	$       320,000.00
31-Dec-19	$                                    14,400.00	$             1,298.80	$          13,101.20	$            5,195.20	$        325,195.20	$       320,000.00
30-Jun-20	$                                    14,400.00	$             1,298.80	$          13,101.20	$            3,896.40	$        323,896.40	$       320,000.00
31-Dec-20	$                                    14,400.00	$             1,298.80	$          13,101.20	$            2,597.60	$        322,597.60	$       320,000.00
30-Jun-21	$                                    14,400.00	$             1,298.80	$          13,101.20	$            1,298.80	$        321,298.80	$       320,000.00
31-Dec-21	$                                    14,400.00	$             1,298.80	$          13,101.20	$                         -	$        320,000.00	$       320,000.00

• Requirement 3

Date	Accounts title	Debit	Credit
30-Jun-17	Interest Expense	$               13,101.20
	Premium on Bonds Payable	$                  1,298.80
	Cash		$            14,400.00
	(1st interest payment)
31-Dec-17	Interest Expense	$               13,101.20	$                            -
	Premium on Bonds Payable	$                  1,298.80	$                            -
	Cash	$                               -	$            14,400.00
	(2nd interest payment)	$                               -	$                            -