Question

Problem 10-9AB Effective Interest: Amortization of bond premium LO P6 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. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 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 $ 0 Required 1 Required 2 >

Answer 1

Solution 1:

Total bond interest expense over the life of bond
Particulars	Amount
Amount Repaid:
10 semiannual interest payments of $21,600 each	$216,000.00
Par Value at Maturity	$480,000.00
Total Repaid	$696,000.00
Less: Amount borrowed	$499,483.00
Total bond interest expense	$196,517.00

Solution 2:

Bond Amortization Table
Semiannual interest period end	Cash interest paid	Bond Interest Expense	Premium Amortization	Unamortized Premium	Carrying Value
1-Jan-19				$19,483	$499,483
30-Jun-19	$21,600	$19,979	$1,621	$17,862	$497,862
31-Dec-19	$21,600	$19,914	$1,686	$16,177	$496,177
30-Jun-20	$21,600	$19,847	$1,753	$14,424	$494,424
31-Dec-20	$21,600	$19,777	$1,823	$12,601	$492,601
30-Jun-21	$21,600	$19,704	$1,896	$10,705	$490,705
31-Dec-21	$21,600	$19,628	$1,972	$8,733	$488,733
30-Jun-22	$21,600	$19,549	$2,051	$6,682	$486,682
31-Dec-22	$21,600	$19,467	$2,133	$4,550	$484,550
30-Jun-23	$21,600	$19,382	$2,218	$2,332	$482,332
31-Dec-23	$21,600	$19,268	$2,332	$0	$480,000

Solution 3:

Journal Entries - Ellis
Date	Particulars	Debit	Credit
30-Jun-19	Interest Expense Dr	$19,979.00
	Premium on bond Dr	$1,621.00
	To Cash		$21,600.00
	(Being first semiannual interest payment made and premium amortized)
31-Dec-19	Interest Expense Dr	$19,914.00
	Premium on bond Dr	$1,686.00
	To Cash		$21,600.00
	(Being 2nd semiannual interest payment made and premium amortized)