Question

Ellis Company issues 9.0%, five-year bonds dated January 1, 2019, with a $480,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $499,483. The annual market rate is 8% on the issue date.

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.

1.

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 0 Less amount borrowed Total bond interest expense $0

2.

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 01/01/2019 06/30/2019 12/31/2019 06/30/2020 12/31/2020 06/30/2021 12/31/2021 06/30/2022 12/31/2022 06/30/2023 12/31/2023 Total

3.

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

Journal entry worksheet

Note: Enter debits before credits.

	Date General Journal Debit Credit Jun 30, 2019

	Date General Journal Debit Credit Dec 31, 2019

Answer 1

SOLUTION : 1
	Total bond interest expenses over the bond's life
	Amount Repiad:
	Payment of interest expenses	$2,16,000
	($ 480,000 X 9% X 5 years)
	Par value at maturity	$4,80,000
	Total Repaid	$6,96,000
	Less: Amount borrowed	$4,99,483
	Bond Interest Expenses	$1,96,517
SOLUTION : 2
	Periodically payment = $ 480,000 X 9% X 6/12=	$21,600
Semiannual Period-End	Cash Interest Paid	Bond Interest Expense	Premium Amortization	Unamortized Premium	Carrying Value		Intrest on carrying vale at market rate (8%/ 2) = 4%
01/01/2019		$                          -	$                  -	19483	$4,99,483
06/30/2019	$                                                       21,600.00	$               19,979.32	$         1,620.68	$17,862	$4,97,862		$19,979.32
12/31/2019	$                                                       21,600.00	$               19,914.49	$         1,685.51	$16,177	$4,96,177		$19,914.49
06/30/2020	$                                                       21,600.00	$               19,847.07	$         1,752.93	$14,424	$4,94,424		$19,847.07
12/31/2020	$                                                       21,600.00	$               19,776.96	$         1,823.04	$12,601	$4,92,601		$19,776.96
06/30/2021	$                                                       21,600.00	$               19,704.03	$         1,895.97	$10,705	$4,90,705		$19,704.03
12/31/2021	$                                                       21,600.00	$               19,628.19	$         1,971.81	$8,733	$4,88,733		$19,628.19
06/30/2022	$                                                       21,600.00	$               19,549.32	$         2,050.68	$6,682	$4,86,682		$19,549.32
12/31/2022	$                                                       21,600.00	$               19,467.30	$         2,132.70	$4,550	$4,84,550		$19,467.30
06/30/2023	$                                                       21,600.00	$               19,381.99	$         2,218.01	$2,332	$4,82,332		$19,381.99
12/31/2023	$                                                       21,600.00	$               19,268.00	$         2,332.00	$0	$4,80,000		$19,293.27
SOLUTION : 3
Journal Entries
Date	Account Title and explanation	Debit	Credit
June 30, 2019	Interest Expenses	$                           19,979
	Premium on Bond Issue	$                             1,621
	Cash		$                21,600
December 31, 2019	Interest Expenses	$                           19,979
	Premium on Bond Issue	$                             1,621
	Cash		$                21,600