Question

Ike issues $130,000 of 13%, three-year bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. They are issued at $133,201. Their market rate is 12% at the issue date.

Required:

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.

3. 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….) Journal entry to record the issuance of bond :
Date	General journal	Debit	credit
January 1 2017	Cash	133201
	To Premium on bonds payable		3201
	To bonds payable		130000
	(Being Issuance of bonds @ premium )
2)..) Total bond interest expense over life of bond :
Amount repaid :
6 payments of 8450	50700
Par value at maturity	130000			130000	Principal	16900	Full year interest
Total repaid	180700			13%	Interest	8450	paid semi annually
less : Amoount borrowed	-133201
Total bond interest expense	47499
3…) Amortization schedule that determines the effective rate each period :
Semi annual interest period end	Cash interest	bond interest expense @ 6%	Discount amortization	carrying value		Explaination :
01-01-17				133201		Bond interest will be calculated on the carrying value
30-06-17	8450	7992	-458	132743		Discount amortization -= Bond interest - cash interest
31-12-17	8450	7965	-485	132258		Carrying value = previous closing balance + discount amortization
30-06-18	8450	7935	-515	131743
31-12-18	8450	7905	-545	131198
4)….Journal entry to record interest expense on June 30,2017
Date	General journal	Debit	credit
30-06-17	Interest expense	7992
	Premium on bonds payable'	458
	TO cash		8450
31-12-17	Interest expense	7965
	Premium on bonds payable'	485
	TO cash		8450
5)..) Journal entry to record on retirment :
Date	General journal	Debit	credit
01-01-19	Bonds payable	130000
	Premium on bonds payable	1198
	To cash		127400	(130000*0.98)
	To gain on retirement of bonds		3798	(B/F)