Question

Ike issues $250,000 of 13%, three-year bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. They are issued at $256,156. Their market rate is 12% at the issue date.

1. Prepare the January 1, 2017, journal entry to record the bonds' issuance.

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

Prepare an effective interest amortization table for the bonds' first two years.

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

5. Prepare the journal entry to record the bonds' retirement on January 1, 2019, at 98.

Answer 1

(1).

Date	Account Titles & Explanation	Debit	Credit
Jan.1, 2017	Cash	$256156
	Bonds Payable		$250000
	Premium on Bonds Payable		$6156
	(To record issue of bonds payable)

(2).

Total bond interest expense to be recognized over the bonds' life = $91344

Explanation;

Annual interest ($250000 * 0.13) = $32500

Thus 3 years interest will be ($32500 * 3) = $97500

Total interest expenses recognized ($97500 – $6156) = $91344

(3).

Date	Carrying value	Effective interest rate	Interest expense	Interest paid	Amortization
6/30/2017	$256156	0.06	$15369	$16250	- $881
31/12/2017	$255275	0.06	$15316	$16250	- $934
6/30/2018	$254341	0.06	$15260	$16250	- $990
31/12/2018	$253351	0.06	$15201	$16250	- $1049

(4).

Date	Account Titles & Explanation	Debit	Credit
June 30, 2017	Interest Expense	$15369
	Premium on Bonds Payable	$881
	Cash		$16250
	(To record interest payment)
Dec. 31, 2017	Interest Expense	$15316
	Premium on Bonds Payable	$934
	Cash		$16250
	(To record interest payment)

(5).

Date	Account Titles & Explanation	Debit	Credit
Jan.1, 2019	Bonds Payable	$250000
	Premium on Bonds Payable	$2302
	Cash ($250000 * 0.98)		$245000
	Gain on Retirement of Bonds		$7302
	(To record retirement of bonds payable)