Question

Problem 10-3A Straight-Line: Amortization of bond premium LO P3 Ellis Company issues 8.0%, five-year bonds dated January 1, 2019, with a $600,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $651,181. The annual market rate is 6% 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

ANSWER :-

8% Given Information Bonds face value $600,000 bonds Interest Rate Market interest rate 6% Bonds pay interest on June 30 and December 31 Bonds issued price $651,181 Bond period 5 years Requirement 1: Calculating Total Bond interest expense over the bond's life. Computation of premium on bonds payable: Face value of the Bonds $600,000 Issued price of the Bonds $651,181 Premium on Bonds payable($651181-$600000) $51,181 Premium on bonds payable per year($51181/5) $10,236.20 Interest payable per year($600000*8%) Less: Premium on bonds payable per year Interest Expense per year($48000-$10236.20) $48,000.00 $10,236.20 $37,763.80 Interest expense over the bonds life i.e for 5 years is ($37763.80*5) $188,819

Requirement 2: Table showing Straight line amortization of premium on bonds payable over bond's life Credit Interest expense (B-C)=(D) (B) Bond's face Cash Date value payment (A) January 1,2019 $600,000 June 30, 2019 $600,000 $24,000.00 December 31, 2019 $600,000 $24,000.00 June 30, 2019 $600,000 $24,000.00 December 31, 2019 $600,000 $24,000.00 June 30, 2019 $600,000 $24,000.00 December 31, 2019 $600,000 $24,000.00 June 30, 2019 $600,000 $24,000.00 December 31, 2019 $600,000 $24,000.00 June 30, 2019 | $600,000 $24,000.00 December 31,2019 $600,000 $24,000.00 $18,881.90 $18,881.90 $18,881.90 $18,881.90 $18,881.90 $18,881.90 $18,881.90 $18,881.90 $18,881.90 $18,881.90 balance of premium on bonds payable (E) $51,181 $46,062.90 $40,944.80 $35,826.70 $30,708.60 $25,590.50 $20,472.40 $15,354.30 $10,236.20 $5,118.10 $0.00 amortization Carrying of bond's value of premium the bonds (C) (F) $651,181 $5,118.10 $646,062.90 $5,118.10 $640,944.80 $5,118.10 $635,826.70 $5,118.10 $630,708.60 $5,118.10 $625,590.50 $5,118.10 $620,472.40 $5,118.10 $615,354.30 $5,118.10 $610,236.20 $5,118.10 $605,118.10 $5,118.10 $600,000.00 Explanation: Cash payment (B) is the actual interest amount paid by the company semi annually i.e for every six months. Face value of the bond is $600000 Interest rate of bond is 8% Interest payable amount is ($600000*8%) $48000 Interest payable semi annually is ($480008/2) $24000 Premium on bonds paybale(C) over bonds life is $51181 amortization of bond's premium annually is ($51181/5) $10236.20 amortization of bond's premium semi annually is ($10236.20/2) $5118.10

Interest expense(D) is the actual expense to the company i.e the difference between interest Ipayabe and the amortization of premium on bonds payable. Interest expense = Cash paid - amortization of premium on bonds = $24000-$5181.10 $18,818.90 Journal Entry for the interest payment is as follows: Account Title and Explanation Debit ($) Credit($) Interest expense 18881.9 Premium on bonds payable 5118.1 Cash 24000 Credit balance of premium on bonds payable (E) is the remaining balance of premium for every amortization. i.e previous credit balance - current perod amortization of premium on bonds Carrying value of bonds(F) = Previous period carrying value of bonds - Amortization value of premium Credit($) Requirement 3: Journal Entries for the interest payments Date Account Title and Explanation Debit ($) June 30, 2019 Interest expense $18,881.90 Premium on bonds payable $5,118.10 Cash December 31, 2019 Interest expense $18,881.90 Premium on bonds payable $5,118.10 Cash $24,000.00 $24,000.00

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