Question

Straight -line amortization of bond premium or discount Four Seasons issues $2,000,000 of 8 %, 4 -year bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. The bonds are issued at a price of $2,030,000.

Required

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

2. For each semiannual period, compute ( a ) the cash payment,

(b) the straight-line premium or discount amortization,

(c)the bond interest expense( d). Unamortized premium or discount, and bond carrying value.

3. Determine the total bond interest expense to be recognized over the bonds’ life.

4. Prepare a bond amortization table using the straight -line method.

5.Prepare the journal entries to rec ord all the interest

payments.

6. Record the journal entry to record the payback of

the bond at maturity

Answer 1

1. Journal entry for bond issuance on Jauary 1,2017

Debit: Cash $2030000

Credit: Premium on bonds payable $30000

Credit: Bonds payable $2000000

(for issue of 2000000 bonds at premium)

2. Interest payment of 8% is semi annually, so rate of interest is 4% per half year and time is 4*2 = 8 years

Bond premium = $2000000 - $2030000 = $30000

Bond premium amortization =$30000 / 8 = $3750 per period

Bond interest payment = $2000000 * 4% = $80000 per period

Bond Amortization table:

Date Net carrying value Straight line Interest payment Interest expense

Amortization Face * Coupon Paid - Premium

30 Jun 2017 2030000 3750 80000 76250

31 Dec 2017 2026250 3750 80000 76250

30 Jun 2018 2022500 3750 80000 76250

31 Dec 2018 2018750 3750 80000 76250

30 Jun 2019 2015000 3750 80000 76250

31 Dec 2019 2011250 3750 80000 76250

30 Jun 2020 2007500 3750 80000 76250

31 Dec 2020 2003750 3750 80000 76250

31 Dec 2020 2000000   

3. Total bond interest expense to be recognized over the bond's life = $76250 *8 = $610000. (being interest expense calculated as above and multiplied by no. of periods i.e. 8 years)

4. Bond amortization table is already prepared above.

5.Since we are using the straight line method to amortize the premium on bonds, so the journal entry for all the interest payments will be same in each period.

Required Journal entry for interest payment each period is:

Debit: Bond interest expense $76250

Debit: Premium on bonds payable $3750

Credit: Cash $80000

(for interest payment and premium amortization)

6. Journal entry for retiring the bond at maturity:

Debit: Bonds payable $2000000

Credit: Cash $2000000

(for bonds retiring at maturity and cash paid)