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 2,030,00

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

For each semiannual period, compute

the cash payment,

the straight-line premium or discount amortization

the bond interest expense

Cash proceeds=   2,030,000 x .08

Cash proceeds=   1,624,000

Bonds interest expense= cash interest paid + bond discount

Bonds interest expense=      (8 x 81,200) + 40,6000

Bonds interest expense=       64,9600 + 40,6000

Bonds interest expense=           10,556,000

Unamortized premium or discount, and bond carrying value

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

Prepare an amortization table using the straight-line method.

Prepare the journal entries to record all the interest payments.

Record the journal entry to record the payback of the bond at maturity

Answer 1

Date	Account Titles and Explanation	Debit	Credit
Jan. 1, 2017	Cash	2030000
	Bonds payable		2000000
	Premium on bonds payable		30000
	(To record issuance of bonds)
Jun. 30, 2017	Interest expense	76250
	Premium on Bonds Payable ($30000/4 x 1/2)	3750
	Cash ($2000000 x 8% x 1/2)		80000
	(To record interest payable on bonds)
Dec. 31, 2017	Interest expense	76250
	Premium on Bonds Payable ($30000/4 x 1/2)	3750
	Cash ($2000000 x 8% x 1/2)		80000
	(To record interest payable on bonds)
Jun. 30, 2018	Interest expense	76250
	Premium on Bonds Payable ($30000/4 x 1/2)	3750
	Cash ($2000000 x 8% x 1/2)		80000
	(To record interest payable on bonds)
Dec. 31, 2018	Interest expense	76250
	Premium on Bonds Payable ($30000/4 x 1/2)	3750
	Cash ($2000000 x 8% x 1/2)		80000
	(To record interest payable on bonds)
Jun. 30, 2019	Interest expense	76250
	Premium on Bonds Payable ($30000/4 x 1/2)	3750
	Cash ($2000000 x 8% x 1/2)		80000
	(To record interest payable on bonds)
Dec. 31, 2019	Interest expense	76250
	Premium on Bonds Payable ($30000/4 x 1/2)	3750
	Cash ($2000000 x 8% x 1/2)		80000
	(To record interest payable on bonds)
Jun. 30, 2020	Interest expense	76250
	Premium on Bonds Payable ($30000/4 x 1/2)	3750
	Cash ($2000000 x 8% x 1/2)		80000
	(To record interest payable on bonds)
Dec. 31, 2020	Interest expense	76250
	Premium on Bonds Payable ($30000/4 x 1/2)	3750
	Cash ($2000000 x 8% x 1/2)		80000
	(To record interest payable on bonds)
Jan. 1, 2021	Bonds payable	2000000
	Cash		2000000
	(To record payback of bonds at maturity)

Amortization Table:

	A	B	C	D	E
Date	Payment	Interest Expense	Premium Amortization	Unamortized Premium	Bond Carrying Value
		(A - C)	(30000 / 8)	(D - C)	(E - C)
Jan. 1, 2017				30000	2030000
Jun. 30, 2017	80000	76250	3750	26250	2026250
Dec. 31, 2017	80000	76250	3750	22500	2022500
Jun. 30, 2018	80000	76250	3750	18750	2018750
Dec. 31, 2018	80000	76250	3750	15000	2015000
Jun. 30, 2019	80000	76250	3750	11250	2011250
Dec. 31, 2019	80000	76250	3750	7500	2007500
Jun. 30, 2020	80000	76250	3750	3750	2003750
Dec. 31, 2020	80000	76250	3750	0	2000000
	640000	610000	30000

Total bond interest expense to be recognized over the bond's life: $610000