Question

Problem 14-10AB Effective Interest: Amortization of bond; retiring bonds LO P1, P4, P5, P6

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Ike issues $160,000 of 13%, three-year bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. They are issued at $163,940. Their market rate is 12% at the issue date.

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

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

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

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

Semiannual Interest Period-End	Cash Interest Paid	Bond Interest Expense	Premium Amortization	Unamortized Premium	Carrying Value
01/01/2017
06/30/2017
12/31/2017
06/30/2018
12/31/2018

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

Total bond interest expense over life of bonds:
Amount repaid:
	payments of
Par value at maturity
Total repaid			0
Less amount borrowed
Total bond interest expense

Answer 1

Journal entries:
Date	Accounts title and explanations				Debit $	Ceedit $
1
01.01.17	Cash account				163940
	Bonds payable					160000
	Premium on Bonds Payable					3940
2
Amort Chart:
Period	Cash Interest	Interest	Premium	Unamortized	Carrying
		Expenses	Amortized	Premium	value
01.01.17				3940	163940
30.06.17	10400	9836.4	563.6	3376.4	163376.4
31.12.17	10400	9802.58	597.42	2778.98	162779
30.06.18	10400	9766.74	633.26	2145.72	162145.7
31.12.18	10400	9728.74	671.26	1474.46	161474.5
3
Total Interest:
6 Payments of 10400				62400
Maturity amount to be paid				160000
Total repayment				222400
Less: Amount borrowed				163940
Total Interest:				58460
Req 4.
Journal entries:
Date	Accounts title and explanations				Debit $	Ceedit $
30.06.17	Interest expenses				9836.4
	Premium on bonds payable				563.6
	Cash account					10400
31.12.17	Interest expenses				9802.58
	Premium on bonds payable				597.42
	Cash account					10400
Req 5.
Journal entries:
Date	Accounts title and explanations				Debit $	Ceedit $
01.01.19	Bonds payable				160000
	Premium on bonds payable				1474.46
	Cash account (160000*98%)					156800
	Gain on redemption of bonds					4674.46