Question

Hillside issues $4,000,000 of 6%, 15-year bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. The bonds are issued at a price of $4,895,980.

Required:
1. Prepare the January 1, 2017, journal entry to record the bonds’ issuance.
2(a) For each semiannual period, complete the table below to calculate the cash payment.
2(b) For each semiannual period, complete the table below to calculate the straight-line premium amortization.
2(c) For each semiannual period, complete the table below to calculate the bond interest expense.
3. Complete the below table to calculate the total bond interest expense to be recognized over the bonds' life.
4. Prepare the first two years of an amortization table using the straight-line method.
5. Prepare the journal entries to record the first two interest payments.

Answer 1

1
Date	General Journal	Debit	Credit
Jan 01, 2017	Cash	4,895,980
	Premium on bonds payable		895,980
	Bonds payable		4,000,000
2a
Par (maturity) value		Annual Rate		Year		Semiannual cash interest payment
$4,000,000	x	6%	x	6/12	=	$120,000
b
Bonds price		Par (maturity) value		Premium on Bonds Payable		Semiannual periods		Straight-line premium amortization
$4,895,980	-	$4,000,000	=	$895,980	÷	30	=	$29,866
c
Semiannual cash payment		Premium amortization		Bond interest expense
$120,000	-	$29,866	=	$90,134
3
Total bond interest expense over life of bonds:
Amount repaid:
30	payments of	$120,000	3600000
Par value at maturity			4,000,000
Total repaid			7,600,000
Less amount borrowed			4,895,980
Total bond interest expense			2,704,020
4
Semiannual Period-End	Unamortized Premium	Carrying Value
1/1/2017	$895,980	$4,895,980
6/30/2017	866,114	$4,866,114
12/31/2017	836,248	$4,836,248
6/30/2018	806,382	$4,806,382
12/31/2018	776,516	$4,776,516
Date	General Journal	Debit	Credit
30-Jun-17	Bond interest expense	90,134
	Premium on bonds payable	29866
	Cash		120,000
31-Dec-17	Bond interest expense	90,134
	Discount on bonds payable	29866
	Cash		120,000