Question

Ellis issues 6.5%, five-year bonds dated january 1, 2015, with a $250,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $255,333. The annual market rate is 6% on the issue date.

1.calculate the total bond interest expense over the bond life

2. Prepare a straight-line amortization table like exhibit 14.11 for the bonds' life.

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

Answer 1

1.Total bond interest expense over the bond life = $75,917

Amount repaid:
10 Interest payments 10 x [ $250000 x 3.5%]	$81,250
Add : Par Value	$2,50,000
Total repayments	$3,31,250
Less :Amount borrowed	($255,333)
Total bond interest expense	$75,917

2. Straight-line amortization table

Period	Premium Amortization	Unamortized Premium	Carrying Value
01/01/2015	-	5,333	255,333
06/30/2015	533	4,800	254,800
12/31/2015	533	4,266	254,266
06/30/2016	533	3,733	253,733
12/31/2016	533	3,200	253,200
06/30/2017	533	2,667	252,667
12/31/2017	533	2,133	252,133
06/30/2018	533	1,600	251,600
12/31/2018	533	1,067	251,067
06/30/2019	533	533	250,533
12/31/2019	533	-	250,000
Total	5,333

*Premium amortization per year = $5,333 / 10 = $533

3.Journal entries to record the first two interest payments

First Interest Payment

Interest Expenses A/c	$7,592
Premium on Bonds Payable A/c	$533
To Cash A/c		$8,125

Cash = $2,50,000 x 3.5% =$8,125

Amortization of Premium on Bond payable = $5,333 / 10 = $533

Interest Expenses = $8,125 - $533 = $7,592

Second Interest Payment

Interest Expenses A/c	$7,592
Premium on Bonds Payable A/c	$533
To Cash A/c		$8,125

Cash = $2,50,000 x 3.5% = $8,125

Amortization of Premium on Bond payable = $5,333 / 10 = $533

Interest Expenses = $8,125 - $533 = $7,592