Question

Ellis issues 9.0%, five-year bonds dated January 1, 2016, with a $550,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $572,305. The annual market rate is 8% on the issue date.

Required:

1. Complete the below table to calculate the total bond interest expense over the bonds' life.

2. Prepare a straight-line amortization table for the bonds’ life.

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

Answer 1

Req 1: TOTAL INTEREST EXPENSE FOR LIFE OF BONDS:
Interest payment
$ 24750 for period of 10 peiod				247,500
maturity amount to be paid at end of 5 years				550,000
Total amount to be paid				797,500
Less: Amount received at the time of issuance				572,305
Interest expense for the life of bonds				225,195
Req 2:
Amortization table:
Issue prrice			572,305
Less: par value			550,000
Total premium paid			22,305
Number of periods (5*2)			10
Premium Amortized in each payment			2,231
Amortization table:
Date	cash interest		Premium amortized		Interest expense		Unamortized Premium
30.06.2016	24750		2230.5		22519.5		20074.5
31.12.2016	24750		2230.5		22519.5		17844
30.06.2017	24750		2230.5		22519.5		15613.5
31.12.2017	24750		2230.5		22519.5		13383
30.06.2018	24750		2230.5		22519.5		11152.5
31.12.2018	24750		2230.5		22519.5		8922
30.06.2019	24750		2230.5		22519.5		6691.5
31.12.2019	24750		2230.5		22519.5		4461
30.06.2020.	24750		2230.5		22519.5		2230.5
31.12.2020	24750		2230.5		22519.5		0
Req 3:
date	Accounts title and explanations				Debit $	Credit $
30.06.2016	Interest expense Dr.				22519.5
	Premium on Bonds payable Ddr.				2230.5
	cash Account					24750
31.12.2016	Interest expense Dr.				22519.5
	Premium on Bonds payable Ddr.				2230.5
	cash Account					24750