Question

Ike issues $90,000 of 11%, three-year bonds dated January 1, 2019, that pay interest semiannually on June 30 and December 31. They are issued at $92,283. When the market rate is 10%.

1. Prepare the January 1 journal entry to record the bonds' issuance.

2. Complete the below table to calculate the total bond interest expense to be recognized over the bonds' life.

3. Prepare an effective interest amortization table for the bonds' first two years

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

2)

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 90,000 90,000 $ 90.000

3)

Answer 1

Requirement 1:

Date	Account title and Explanation	Debit	Credit
Jan 1,2019	Cash	$92,283
	Bonds payable		$90,000
	Premium on bonds payable		$2,283
	[To record issuance of bonds]

Requirement 2:

Total bond interest expense over life of bonds:
Amount repaid:
6 payments of $4,950*	$29,700
Par value at maturity	$90,000
Total repaid	$119,700
Less: Amount borrowed	($92,283)
Total bond interest expense	$27,417

*Payments = $90,000 x 11% x 6/12 = $ 4,950

Requirement 3:

Semiannual Interest Period-End	Cash interest Paid	Bond Interest Expense	Premium Amortization	Unamortized Premium	Carrying Value
01/01/2019				$2,283	$92,283
06/30/2019	$4,950	$4,614.15	$336	$1,947	$91,947
12/31/2019	$4,950	$4,597.36	$353	$1,595	$91,595
06/30/2020	$4,950	$4,579.73	$370	$1,224	$91,224
12/31/2020	$4,950	$4,561.21	$389	$835	$90,835

Bond interest expense = Preceding carrying value x 5% [Semi-annual rate of market rate of 10%]

Premium amortization = Cash interest paid - Bond interest expense

Carrying value = Preceding carrying value - Premium amortization

Requirement 4:

Date	Account title and Explanation	Debit	Credit
06/30/2019	Interest expense	$4,614
	Premium on bonds payable	$336
	Cash		$4,950
	[To record payment of first interest payment]
12/31/2019	Interest expense	$4,597
	Premium on bonds payable	$353
	Cash		$4,950
	[To record payment of second interest payment]