In: Accounting
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.
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Prepare an effective interest amortization table for the bonds' first two years.
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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.
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Record the second interest payment on December 31, 2017.
Note: Enter debits before credits.
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.
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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 |