Question

Chapter 10 Question 4:

Ellis issues 9.0%, five-year bonds dated January 1, 2017, with a $550,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $572,325. The annual market rate is 8% on the issue date. (Table B.1, Table B.2, Table B.3, and Table B.4) (Use appropriate factor(s) from the tables provided.)

Chapter 10 Question 4:

Required:
1. Compute the total bond interest expense over the bonds' life.
2. Prepare an effective interest amortization table for the bonds’ life.
3. Prepare the journal entries to record the first two interest payments.
4. Use the market rate at issuance to compute the present value of the remaining cash flows for these bonds as of December 31, 2019.

Compute the total bond interest expense over the bonds' life.

	Total bond interest expense over life of bonds: Amount repaid: payments of Par value at maturity Total repaid Less amount borrowed Total bond interest expense

Prepare an effective interest amortization table for the bonds’ life.

Semiannual 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 06/30/2019 12/31/2019 06/30/2020 12/31/2020 06/30/2021 12/31/2021 Total Prepare the journal entries to record the first two interest payments. Journal entry worksheet 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 Use the market rate at issuance to compute the present value of the remaining cash flows for these bonds as of December 31, 2019. (Round table values to 4 decimal places, and use rounded values in all calculations.) Table values are based on: n = i = Cash Flow Table Value Amount Present Value Par (maturity) value Interest (annuity) Price of bonds

Answer 1

1)
Total bond interest expense over life of bonds:
Amount repaid:
10 Payments of $24,750 *	$247,500.00
Par value at maturity	$550,000.00
Total repaid	$797,500.00
Less amount borrowed	-$572,325.00
Total bond interest expense	$225,175.00
* $550,000 x 9%/2	$24,750.00
2)
Prepare an effective interest amortization table for the bonds’ life.
A	B	C	D	E	F
Semiannual Period-End	Cash Interest Paid = 4.5% x $550,000	Bond Interest Expense = 8%/2 x Previous Carrying value	Premium Amortization (Difference Cash interest - Bond interest Exp.(C- B)	Unamortized Premium	Carrying Value = Previous G +D
01/01/2017				$22,325.00	$572,325.00
06/30/2017	$24,750.00	$22,893.00	-$1,857.00	$20,468.00	$570,468.00
12/31/2017	$24,750.00	$22,818.72	-$1,931.28	$18,536.72	$568,536.72
06/30/2018	$24,750.00	$22,741.47	-$2,008.53	$16,528.19	$566,528.19
12/31/2018	$24,750.00	$22,661.13	-$2,088.87	$14,439.32	$564,439.32
06/30/2019	$24,750.00	$22,577.57	-$2,172.43	$12,266.89	$562,266.89
12/31/2019	$24,750.00	$22,490.68	-$2,259.32	$10,007.56	$560,007.56
06/30/2020	$24,750.00	$22,400.30	-$2,349.70	$7,657.87	$557,657.87
12/31/2020	$24,750.00	$22,306.31	-$2,443.69	$5,214.18	$555,214.18
06/30/2021	$24,750.00	$22,208.57	-$2,541.43	$2,672.75	$552,672.75
12/31/2021	$24,750.00	$22,077.25	-$2,672.75	-$0.00	$550,000.00
Total	$247,500.00	$225,175.00	-$22,325.00
3)Prepare the journal entries to record the first two interest payments.
Journal entry worksheet
Record the first interest payment on June 30, 2017.
Date	General Journal	Debit	Credit
Jun 30, 2017	Bond interest expense	$22,893.00
	Premium on bonds payable	$1,857.00
	Cash		$24,750.00
Date	General Journal	Debit	Credit
Dec 31, 2017	Bond interest expense	$22,818.72
	Premium on bonds payable	1931.28
	Cash		$24,750.00
4)Use the market rate at issuance to compute the present value of the remaining cash flows for these bonds as of December 31, 2019. (Round table values to 4 decimal places, and use rounded values in all calculations.)
Table values are based on:
n =	4
i =	4.00%
Cash Flow	Table Value	Amount	Present Value
Par (maturity) value	0.85480	$550,000.00	$470,140.00
Interest (annuity)	3.6299	$24,750.00	$89,840.02
Price of bonds			$560,007.56	approx