Question

In: Accounting

Ike issues $110,000 of 9%, three-year bonds dated January 1, 2017, that pay interest semiannually on...

Ike issues $110,000 of 9%, three-year bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. They are issued at $112,881. Their market rate is 8% at the issue date.

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 $0

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

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

Record the first interest payment on June 30, 2017.

Note: Enter debits before credits.

Date General Journal Debit Credit
Jun 30, 2017

Record the second interest payment on December 31, 2017.

Note: Enter debits before credits.

Date General Journal Debit Credit
Dec 31, 2017

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

Record the retirement of the bonds on January 1, 2019 at 98.

Note: Enter debits before credits.

Date General Journal Debit Credit
Jan 01, 2019

Solutions

Expert Solution

Solution 1:

Total bond interest expense over the life of bond
Particulars Amount
Amount Repaid:
6 payments of ($110000*9%*6/12=) $4950 each $29,700
Par Value at Maturity $1,10,000
Total Repaid $1,39,700
Less: Amount borrowed $1,12,881
Total bond interest expense $26,819

Solution 2:

Bond Amortization Schedule
Date Cash interest Interest Expense Premium amortization Unamortized premium Carrying value
01-Jan-17 $2,881 $1,12,881
30-Jun-17 $4,950 $4,515 $435 $2,446 $1,12,446
31-Dec-17 $4,950 $4,498 $452 $1,994 $1,11,994
30-Jun-18 $4,950 $4,480 $470 $1,524 $1,11,524
31-Dec-18 $4,950 $4,461 $489 $1,035 $1,11,035

Solution 3:

Journal Entries
Date Particulars Debit Credit
30-Jun-17 Interest Expense Dr $4,515
Premium on Bond Payable $435
      To Cash $4,950
(To record Interest on June 30, 2017)
Journal Entries
Date Particulars Debit Credit
31-Dec-17 Interest Expense Dr $4,498
Premium on Bond Payable $452
      To Cash $4,950
(To record Interest on Dec 31, 2017)

Solution 4:

Journal Entries
Date Particulars Debit Credit
01-Jan-19 Bond Payable Dr $1,10,000
      To Cash $1,10,000

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