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 $530,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $575,210. 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. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Complete the below table to calculate 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 $ 0 < Required 1 Required 2 >

Answer 1

1.

Par value of bonds = $530,000

Issue price of bonds = $575,210

Premium on bonds payable = Issue price of bonds - Par value of bonds

= $575,210 - $530,000

= $45,210

Semi annual interest payment = 530,000 x 8% x 6/12

= $21,200

Total bond interest expense over the life of the bonds

Amount repaid
10 payments of $21,200	212,000
Par value at maturity	530,000
Total repayments	742,000
Less amount borrowed (from part 1)	- 575,210
Total bond interest expense	$166,790

2.

Semi annual bond premium amortization = Premium on bonds payable/Number of semi annual interest payments

= 45,210/10

= $4,521

Straight line amortization table

Semi annual period end	Unamortized premium	Carrying value
1/1/19	45,210	575,210
6/30/19	45,210 - 4,521 = 40,689	575,210 - 4,521 = 570,689
12/31/19	40,689 - 4,521 = 36,168	570,689 - 4,521 = 566,168
6/30/20	36,168 - 4,521 = 31,647	566,168 - 4,521 = 561,647
12/31/20	31,647 - 4,521 = 27,126	561,647 - 4,521 = 557,126
6/30/21	27,126 - 4,521 = 22,605	557,126 - 4,521 = 552,605
12/31/21	22,605 - 4,521 = 18,084	552,605 - 4,521 = 548,084
6/30/22	18,084 - 4,521 = 13,563	548,084 - 4,521 = 543,563
12/31/22	13,563 - 4,521 = 9,042	543,563 - 4,521 = 539,042
6/30/23	9,042 - 4,521 = 4,521	539,042 - 4,521 = 534,521
12/31/23	4,521 - 4,521 = 0	534,521 - 4,521 = 530,000

3.

6/30/19	Interest expense	16,679
	Premium on bonds payable	4,521
	Cash		21,200
12/31/19	Interest expense	16,679
	Premium on bonds payable	4,521
	Cash		21,200