Question

On January 1, 2021, Cullumber Ltd. issued bonds with a maturity value of $7,800,000 when the market rate of interest was 4%. The bonds have a coupon (contractual) interest rate of 5% and mature on January 1, 2031. Interest on the bonds is payable semi-annually on July 1 and January 1 of each year. The company’s year end is December 31.

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Issue Price$

CULLUMBER LTD. Bond Premium Amortization Table Effective Interest Method—Semi-Annual Interest Payments 5% Bonds Issued at market rate of 4%
Date		Interest Payment		Interest Expense		Premium Amortization		Bond Amortized Cost
Jan. 1, 2021		$		$		$		$
July 1, 2021
Jan. 1, 2022
July 1, 2022
Jan. 1, 2023

Prepare all of the required journal entries related to the bonds that Cullumber Ltd. will record during 2021, including any adjusting journal entries at December 31, 2021.

Date	Account Titles and Explanation	Debit	Credit
Jan. 1
	(To record issuance of bonds.)
July 1
	(To record interest payment.)
Dec. 31

CULLUMBER LTD. Balance Sheet (Partial)                                                                       For the Year Ended December 31, 2021December 31, 2021For the Month Ended December 31, 2021
Non-Current LiabilitiesCurrent LiabilitiesProperty, Plant and EquipmentShareholders' EquityCurrent Assets
		$
Current AssetsNon-Current LiabilitiesProperty, Plant and EquipmentShareholders' EquityCurrent Liabilities

Date	Account Titles and Explanation	Debit	Credit
Jan. 1
	(To record interest payment.)

Date	Account Titles and Explanation	Debit	Credit
Jan. 1
	(To record redemption of bonds.)

Date	Account Titles and Explanation	Debit	Credit
Jan. 1
	(To record maturity of bond.) What will be the total interest payment over the 10-year life of the bonds? What will be the total interest expense over the 10-year life of the bonds? (Round answers to 0 decimal places, e.g. 5,275.) Interest Payment $ Interest Expense $

Answer 1

value of bond	(coupon payment*PVAF at 2% for 20 semiannual period)+(face value*PVF at 2% at 20th semiannual period)	(195000*16.351)+(7800000*.672971)	8437618.8
Coupon payment	7800000*5%*1/2	195000
face value		7800000
PVAF at 2% for 20 semiannual period	1-(1+r)^-n/r   r =2% n =20	1-(1.02)^-20 / 2%	.32702/2%	16.351
PVF at 2% at 20th semiannual period	1/(1+r)^n r = 2% n =20	1/1.02^20		0.672971
date	Interest payment	Interest expense	premium amortization	Bond amortized cost
Jan 1 2021				8437619
July 1 2021	195000	168752.38	26247.624	8411371
Jan 1 2022	195000	168227.42	26772.57648	8384599
July 1 2022	195000	167691.97	27308.02801	8357291
Jan 1 2023	195000	167145.81	27854.18857	8329436
date	explanation	debit	credit
Jan 1 2021	cash	8437618.8
	premium on bonds payable		637618.8
	bonds payable		7800000
July 1 2021	Interest expense	168752.38
	premium on bonds payable	26247.624
	cash		195000
dec 31 2021	Interest expense	168227.42
	premium on bonds payable	26772.576
	interest payable		195000
jan 1 2022	interest payable	195000
	cash		195000
Balance Sheet
Current liabilities
interest payable		195000
Non current liabilities
Bonds payable	7800000	8384598.6
premium on bonds payable	584598.5995
total of liabilities		8579598.6
date	explanation	debit	credit
Jan 1 2031	Bonds payable	7800000
	bond holders		7800000
Jan 1 2031	bond holders	7800000
	cash		7800000
Total interest paid	Coupon payment*periods of coupon payment	195000*20	3900000
total Interest payment =interest payment-premium amortized	3900000-637618.8		3262381.2